THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 

LOS  ANGELES 


THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 

LOS  ANGELES 


INSURANCE  AND  THE  STATE 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   •    CHICAGO  •    DALLAS 
ATLANTA  •   SAN  FRANCISCO 

MACMILLAN  &  CO.,  LIMITED 

LONDON  •    BOMBAY  •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  LTD. 

TORONTO 


INSURANCE   AND    THE 
STATE 


BY 


W.  F.  GEPHART,  PH.D. 

PROFESSOR  OF   ECONOMICS,   WASHINGTON   UNIVERSITY 
AUTHOR  OF   "  PRINCIPLES   OF   INSURANCE  " 


THE  MACMILLAN  COMPANY 
1913 

Att  rights  reserved 


COPTBKHTT,   1918, 

Bv  THE  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.     Published  September,  1913. 


NottoooB 

J.  8.  Gushing  Co.  —  Berwick  <fc  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


Bus.  Admin, 
Library 


811! 


PREFACE 

No  more  interesting  aspect  of  the  public's  atti- 
tude towards  insurance  has  developed  than  the 
opinion  which  is  beginning  to  be  expressed  in 
many  quarters  that  the  business  should  be  made 
a  public  monopoly.  It  is  difficult  to  explain  fully 
the  origin  of  this  opinion.  Perhaps  it  has  its  ori- 
gin in  part  in  the  belief  by  some  that  the  prac- 
tices of  some  companies  and  officials  prove  that 
individuals  have  forfeited  the  right  to  conduct  in- 
surance as  a  private  business.  This  may  assume 
that  those  holding  this  view  have  such  an  under- 
standing of  insurance  that  they  perceive  its  enor- 
mous social  possibilities  and  conclude  that  the 
possible  social  uses  of  it  are  such  that  private 
interests  must  give  way  to  what  they  conceive  to 
be  a  larger  public  interest.  On  the  other  hand, 
the  opinion  may  be  a  result  of  the  conviction 
which  many  have  come  to  have  that  the  state 
should  be  intrusted  with  any  activity  which  af- 
fects large  numbers  of  its  citizens.  This  assumes 
a  faith  in  the  efficiency  and  integrity  of  public 
officials  which  many  do  not  yet  hold. 

[v] 


PREFACE 

The  author  hopes  that  his  practical  experience 
in  the  business  'and  his  teaching  of  the  subject 
have  made  it  possible  for  him  to  appreciate  the 
arguments  of  the  opposing  parties  to  the  contro- 
versy. This  brief  discussion  is  modestly  offered 
in  the  hope,  therefore,  that  it  may  be  of  some 
value  in  modifying  the  extreme  views  on  each 
side  and  aiding  others  in  reaching  a  rational  con- 
clusion. If  the  discussion  has  any  value,  it  must 
be  because  of  the  questions  which  it  raises  and 
not  of  those  which  it  answers. 

No  effort  has  been  made  to  write  a  brief  either 
for  or  against  a  state  monopoly  of  insurance. 
Many  of  the  statements  will  doubtless  seem  ab- 
surd to  one  or  the  other  class  of  extremists,  but 
it  is  hoped  that  there  is  a  large  class  who  are 
open  minded  and  will  find  something  in  the  dis- 
cussion to  aid  them  in  arriving  at  a  rational  con- 
clusion. 

Insurance  as  a  subject  for  formal  study  and 
writing  has  received  surprisingly  little  attention 
in  the  United  States,  notwithstanding  the  fact 
that  it  has  had  in  this  country  a  wonderful  devel- 
opment and  has  been  a  subject  for  frequent  legis- 
lation and  investigation  in  the  numerous  states. 

Practically  no  one  except  those  interested  in 
[vi] 


PREFACE 

selling  insurance  and  managing  the  companies 
has  given  the  business  the  study  which  its  impor- 
tance demands.  This  condition  has  been  unfor- 
tunate both  for  the  public  and  the  insurance 
business.  Those  connected  with  the  companies 
came  to  have  in  many  instances  little  respect  for 
the  public's  knowledge  of  insurance  and  some- 
times little  consideration  for  the  public  interest 
involved  in  the  conduct  of  the  business.  Prac- 
tices in  the  formation  and  operation  of  companies 
were  thus  made  possible  which  have  injured  the 
insurance  business,  partly  because  of  the  practices 
themselves  and  partly  because  of  unwisely  enacted 
laws.  As  the  public  became  interested  in  the 
methods  of  business  conduct,  attention  was  di- 
rected to  the  insurance  business  with  the  idea  of 
instituting  certain  reforms.  Yet  when  the  public 
endeavored  to  apply  the  reform  ideas  to  this  busi- 
ness, it  was  found  that  few  legislators  had  the 
knowledge  which  was  necessary  to  direct  construc- 
tive reform  legislation.  Insurance  in  its  funda- 
mental aspects  is  not  like  other  business  in  that 
it  is  not  one  for  great  private  profit.  Yet  as  it 
had  been  practiced  in  many  instances  it  had  be- 
come of  this  character,  and  hence  many  legislators 
classed  it  with  the  ordinary  private  business.  It 

[vii] 


PREFACE 

seemed  to  the  legislator  a  proper  source  of  revenue 
for  the  treasury,  a  business  to  be  placed  under  the 
anti-trust  laws  and  a  business  to  be  discriminated 
against  in  one  state  when  it  was  organized  in  an- 
other state.  The  insurance  class  was  distrusted 
as  a  source  of  information  upon  which  to  base 
legislation.  The  result  has  been  that  legislation 
has  sometimes  been  enacted  from  which  the  busi- 
ness and  ultimately  the  public  have  suffered. 

It  is  hoped  that  the  reader  will  find  in  these 
pages  a  fair  discussion  of  the  diverse  views  of 
legislators  and  the  insurance  fraternity  and  that 
some  light  may  be  thrown  on  the  question  of  the 
proper  relation  of  the  state  to  the  insurance  busi- 
ness. In  our  present  day  zeal  for  state  direction 
of  activities  formerly  of  a  private  nature,  our  con- 
fidence in  the  state  as  an  agent  may  precipitate 
us  into  lines  of  action  before  adequate  study  and 
preparation  have  been  made.  Success  in  collec- 
tive action  as  in  individual  action  cannot  be  pre- 
dicted upon  following  prescribed  rules  of  procedure 
which  are  good  for  all  times  and  for  all  peoples. 

The  data  for  the  statistical  tables  and  calcula- 
tions have  been  taken  from  the  Spectator's  Annuals, 
State  Insurance  Reports,  the  United  States  Census, 
and  Brown's  Book  of  Life  Insurance  Economics, 
[viii] 


PREFACE 

The  first  named  reference  has  been  of  especial 
value.  Caution  has  usually  been  given  against 
making  the  statistics  prove  too  much.  Insur- 
ance statistics  are  peculiarly  susceptible  of  being 
strained  to  prove  a  point. 

W.  F.  GEPHART. 

OHIO  STATE  UNIVERSITY, 
March  1,  1913. 


ix] 


TABLE  OF  CONTENTS 

CHAPTER  I 

PACT 

THE  CHARACTEB  OF  INSURANCE  AND  ITS  LEGAL  STATUS       .        1 

Insurance  a  subject  of  state  and  not  federal  control  — 
The  differences  in  insurance  legislation  in  different  states 

—  Effect  of  this  difference  on  the  development  of  insurance 

—  The  general  character  of  insurance  as  a  business  —  The 
absence  of  great  risk — What  is  the  function  of  the  state  ? — 
Is  insurance  a  suitable  business  for  conduct  by  the  state  ? 

CHAPTER  II 
STATE  INSURANCE  IN  PRACTICE 14 

The  Italian  monopoly  of  life  insurance  —  The  monopoly 
of  sickness  and  accident  insurance  in  Switzerland  —  Other 
examples  in  European  countries  of  state  insurance  —  The 
Wisconsin  plan  of  State  Life  Insurance.  The  Massachu- 
setts plan  of  Savings  Bank  Insurance  —  The  Ohio  mo- 
nopoly of  Industrial  Accident  Insurance. 

CHAPTER  HI 

SHOULD  THE  STATE  MONOPOLIZE  LIFE  INSURANCE?       .        .      80 

Purposes  assigned  —  (1)  as  a  source  of  revenue ;  (2)  for 
social  developmental  purposes ;  (3)  as  a  complete  method 
of  regulation  —  Possible  sources  of  revenue  for  the  state  — 
The  problems  of  state  financiering  involved  —  The  social 

[3d] 


TABLE  OF  CONTENTS 

PAOB 

significance  of  insurance  under  a  state  monopoly  —  Could 
the  state  apply  the  insurance  principle  more  widely  ?  —  Can 
insurance  costs  be  reduced  ?  —  Is  insurance  subject  to  the 
law  of  decreasing  cost  ?  —  To  what  extent  has  private  in- 
surance insured  the  insurable  ?  —  Would  the  state  popular- 
ize insurance  ?  —  Would  the  cost  be  less  ?  —  The  power  of 
the  state  to  regulate  insurance  —  The  absence  of  monopoly 
in  the  insurance  business  —  The  problem  of  politics  under 
state  insurance — Should  private  companies  be  indemnified 
if  the  state  assumes  the  business  ? 


CHAPTER  IV 

THE  NATUBE  op  FIRE  INSURANCE 83 

Fire  and  life  insurance  compared  —  The  fire  insurance 
contract,  a  pure  contract  of  indemnity  —  Fire  insurance  is 
not  a  tax  —  The  risk  in  fire  insurance  —  Conflagrations  — 
The  character  of  fire  insurance  assets  —  The  limitations  on 
the  principle  of  mutuality  in  fire  insurance. 

CHAPTER  V 

SHOULD  THE  STATE  MONOPOLIZE  FIRE  INSURANCE?       .        .    101 

Purposes :  (1)  as  a  source  of  revenue ;  (2)  as  a  method 
of  regulation ;  (3)  for  social  purposes  —  The  profits  of  fire 
insurance  companies  —  Sources  of  the  profit  —  Underwrit- 
ing and  investment  profits  —  The  character  of  the  expense 

—  Is  there  any  evidence  of  a  monopoly  ?  —  The  difficulty 
in  establishing  a  successful  fire  insurance  company  —  Are 
rates  unduly  high,  discriminatory  or  inequitable  ?  —  How 
rates  are  determined  —  Difficulties  in  state  fire  insurance 

—  The  fire  loss  in  the  United  States,  and  in  Europe  — 
Attitude  of   the  companies   towards  the  fire  loss  —  The 
effects  of  valued  policy  and  anti-compact  laws. 

[xii] 


TABLE  OF  CONTENTS 

CHAPTER  VI 

PAGE 

THE  NATURE  OF  SOCIAL  INSURANCE 157 

Definition  of  social  insurance  —  How  the  need  for  such 
insurance  arose  —  The  relation  of  the  state  to  such  insur- 
ance —  The  development  of  the  theory  of  employer's  lia- 
bility —  Liability  insurance  in  the  United  States  —  Legal 
and  popular  restrictions  to  its  development  —  Present  in- 
terest in  plans  of  protecting  the  wage  earner. 

CHAPTER  VH 

SHOULD  THE  STATE  MONOPOLIZE  SOCIAL  INSURANCE?    .        .    174 

Methods  used  to  protect  workmen  against  the  result 
of  industrial  accidents  —  The  results  of  private  liability 
insurance  in  the  United  States  —  The  liability  and  the 
compensation  principle  distinguished  —  The  reasons  for 
compensation  —  Reasons  assigned  for  a  state  monopoly 
of  compensation  insurance  —  Can  the  cost  be  shifted  to 
the  consumer  ?  —  Could  equally  good  results  be  secured 
by  private  companies  selling  compensation  insurance  ?  — 
The  difficulties  of  state  compensation  insurance  in  the 
United  States. 

CHAPTER  VHI 

THE  RELATION  OF  THE  STATE  TO  SICKNESS,  OLD  AGE,  AND 

UNEMPLOYMENT  INSURANCE 208 

The  social  significance  of  sickness  —  Sickness  insurance 
as  a  state  monopoly  distinguished  from  the  monopoly  of 
industrial  accident  insurance  —  Who  should  bear  the  cost  ? 
Methods  of  providing  old-age  insurance  —  Should  the  state 
supply  such  insurance  ?  —  Is  the  insurance  principle  appli- 
cable to  unemployment  ?  —  Causes  of  unemployment  — 
The  general  benefit  and  social  significance  of  social  in- 
surance. 


INSURANCE  AND  THE  STATE 


CHAPTER  I 

THE   CHARACTER  OF  INSURANCE  AND 
ITS  LEGAL  STATUS 

ALL  human  progress  which  is  essentially  an 
increase,  in  social  well-being  has  arisen  from 
some  improved  method  of  cooperation,  whether 
this  new  form  of  cooperation  has  resulted  from 
private  initiative  or  from  public  compulsion  in 
obedience  to  enacted  law.  There  is  probably 
no  other  form  of  cooperation  which  is  so  funda- 
mentally valuable  to  the  cooperative  members, 
indiscriminately,  rather  than  to  particular  mem- 
bers, than  insurance.  In  insurance  is  found  every 
essence  of  cooperation.  It  is  therefore  proposed 
to  examine  the  character  and  status  of  insurance 
as  a  business,  upon  what  may  be  called  the  eve 
of  the  experiment  of  directing  this  form  of  coopera- 
tion by  the  state  rather  than  by  the  initiative  of 

[1] 


INSURANCE  AND  THE  STATE 

private  individuals.  ^Everywhere  in  the  United 
States,  with  certain  minor  exceptions  to  be  dis- 
cussed later,  the  business  of  insurance  is  under 
private  control.  It  is  also  a  business  subject  to 
the  control  of  the  various  states  of  the  Union, 
since  the  Supreme  Court  of  the  United  States  has 
decided  in  a  very  definite  manner  that  it  is  neither 
interstate  commerce  nor  an  instrumentality  of 
commerce.  Hence  it  is  not  under  the  control  of 
Congress;  at  least  it  does  not  fall  under  that 
section  of  the  Constitution  which  gives  to  Con- 
gress extensive  powers  of  controlling  interstate 
and  foreign  commerce. 

Although  the  federal  government  may  exercise 
some  power  over  insurance  by  an  exercise  of  the 
taxation  power,  yet  this  power  is  concurrent  with 
a  similar  power  of  the  states,  and  the  larger  powers 
of  regulation  are  limited  by  the  decisions  of  the 
federal  supreme  court.  It  therefore  appears  that 
the  subject  of  insurance  will  continue  to  be  one 
over  which  the  states  will  exercise  major  control 
An  examination  of  the  present  statutes  in  force 
in  the  various  states  on  the  subject  of  insurance 
discloses  great  variation  in  the  laws.  Some  de- 
sirable uniformity  has  been  accomplished  within 
the  past  decade,  but  lack  of  uniformity  is  the 

[2] 


THE  CHARACTER  OF  INSURANCE 

chief  characteristic  of  state  laws  affecting  insur- 
ance. This  condition  gives  no  promise  of  change. 
The  business  is  essentially  interstate;  that  is  to 
state,  the  greater  percentage  by  far  of  insurance 
in  force  on  the  books  of  the  companies  is  com- 
posed of  policies  from  more  than  one  state.  Yet 
the  legislature  of  each  state  persists  in  treating 
the  business  as  a  purely  state  business.  Most  of 
the  legislatures  attempt  to  favor,  as  they  imagine, 
home  companies,  notwithstanding  the  fact  that  it 
is  usually  the  practice  of  a  home  company  only 
to  confine  its  business  to  the  state  until  it  gets 
under  way  as  a  going  concern.  It  is  true  that  the 
small  local  mutual  companies  restrict  the  terri- 
tory of  operation,  but  every  important  life  and 
property  insurance  company  in  the  United  States 
does  business  in  other  than  the  state  of  its  incor- 
poration. This  confusing,  burdensome,  and  in- 
equitable legislation  takes  various  forms.  It  may 
be  and  is  generally  true  in  the  case  of  the  taxes 
levied  on  insurance.  One  state  may  levy  l£  per 
cent  on  gross  premium  receipts  collected  in  the 
state,  another  2  per  cent  on  the  same,  and  still 
another  1  per  cent  on  the  net  premium  receipts. 
One  state  may  lay  down  in  great  detail  provisions 
regarding  the  formation  of  a  company  and  the 

[3] 


INSURANCE  AND  THE  STATE 

sale  of  its  stock,  while  another  state  may  have  few 
provisions  in  its  laws  regarding  the  subject.  One 
state  may  attempt  "to  keep  money  in  its  borders" 
by  requiring  a  large  percentage  of  the  premiums 
received  in  the  state  to  be  locally  invested,  while 
another  may  permit  the  fullest  liberty  of  invest- 
ment, not  only  as  to  the  principal  sums  collected, 
but  also  as  to  the  kind  of  securities  in  which  the 
sums  may  be  invested. 

The  development  of  insurance,  not  only  as  to 
the  increase  in  the  numbers  of  policyholders  of 
the  ordinary  kinds  of  insurance,  but  also  as  to 
new  applications  of  the  insurance  principle,  that 
is,  new  kinds  of  insurance,  has  been  greatly  hin- 
dered by  this  burden  of  confusing  legislation.  It 
has  added  enormously  to  the  cost  of  insurance  to 
the  policyholders,  and  it  has  made  adjustments 
to  new  conditions  difficult.  New  forms  of  in- 
surance have  slowly  arisen  in  the  United  States 
as  compared  with  the  European  countries,  but 
it  is  not  due  chiefly  to  the  fact  that  the  insurance 
officials  have  been  less  inventive  or  skillful.  The 
wonderful  accomplishments  which  have  been 
secured  in  the  old  established  lines  of  insurance 
give  some  idea  of  what  might  have  been  secured 
if  the  business  had  not  been  hampered  by  restric- 

[4] 


THE  CHARACTER  OF  INSURANCE 

tive  and  confusing  state  legislation.  As  it  is, 
voluntary  insurance  in  America  far  exceeds  in 
number  of  policies  and  volume  of  insurance  all 
that  of  the  remainder  of  the  world. 

Before  the  problem  of  state  insurance  is  con- 
sidered in  detail  it  will  be  well  to  examine  the 
character  of  insurance  as  a  business.  Does  its 
administration  present  difficult  problems  ?  Is 
it  a  business  fraught  with  great  public  or  social 
importance  ?  Insurance,  as  has  been  stated,  is  a 
method  of  cooperation.  It  is  the  joining  together 
of  a  number  of  individuals  necessarily  exposed  to 
a  risk  for  the  purpose  of  collectively  assuming 
and  therefore  distributing  a  risk  otherwise  borne 
by  the  individual.  The  total  risk  assumed  under 
insurance  is  less  than  the  sum  of  the  individual 
risks  borne  previous  to  the  application  of  the  in- 
surance principle.  This  is  true  because  a  larger 
degree  of  certainty  is  exchanged  for  uncertainty, 
inasmuch  as  the  benefit  of  the  law  of  average  is 
secured.  The  application  of  the  insurance  prin- 
ciple presents  no  great  difficulties.  That  is  to 
say,  in  most  forms  of  insurance  the  basis  upon 
which  the  operation  is  made  is  well  understood. 
The  principles  have  been  established  from  the 
study  of  data  and  experience.  Insurance  is,  in 

[5] 


INSURANCE  AND  THE  STATE 

other  words,  in  most  branches  thoroughly  scien- 
tific. There  is  no  great  risk  to  be  assumed  by  the 
organizers.  In  life  insurance  the  mortality  sta- 
tistics are,  as  a  whole,  sufficiently  accurate  to  assure 
that  the  insurance  given  under  them  carries  no 
risk  to  the  insurer.  In  fire  insurance  the  burning 
rate  is  fairly  well  known.  In  other  kinds  of  in- 
surance the  data  may  not  be  either  as  complete 
or  as  accurate,  but  few  inherent  difficulties  will 
be  found  in  placing  in  operation  the  insurance 
principle.  Insurance  is,  in  other  words,  a  safe 
business.  It  is  not  complex.  It  is  relatively 
simple  so  far  as  the  fundamental  principles  upon 
which  it  is  based  are  concerned.  Problems  in- 
deed do  arise  in  the  administration  of  the  business ; 
such,  for  example,  as  the  investment  of  the  funds 
advantageously  and  safely,  and  the  equitable 
determination  of  charges  as  regards  different  in- 
dividuals, but  these  facts  do  not  disprove  the 
original  statement  that  the  principles  underlying 
the  business  are  well  understood  and  that  it  is 
relatively  easy  to  place  them  in  operation..  There- 
fore for  the  state  to  assume  the  business  of  insur- 
ance would  not  involve  its  entering  upon  new, 
untried,  and  dangerous  grounds.  Is  it  a  business 
fraught  with  social  import  ?  If  insurance  is  a 

[6] 


THE  CHARACTER  OF  INSURANCE 

method  of  assuming  and  distributing  necessary 
risks,  it  must  have  great  social  importance.  If 
death,  sickness,  accidents,  and  destruction  of 
property  are  risks  to  which  every  one  in  some  form 
is  subjected,  then  any  means  whereby  the  risks 
are  reduced  must  have  great  social  value.  It  is 
urged  by  some  that  such  is  the  social  value  of  the 
utilization  of  the  insurance  principle  that  the 
members  of  society  should  not  be  permitted  to 
decide  voluntarily  whether  or  no  they  shall  avail 
themselves  of  the  principle,  but  should  be  forced 
to  do  so.  It  is  undoubtedly  true  that  no  one  can 
escape  the  risk,  and  no  means  of  reducing  the  risk 
is  known,  other  than  that  of  using  the  insurance 
principle.  However  true  this  may  be,  it  does  not 
follow  as  a  consequence  that  the  state  should 
necessarily  assume  this  business. 

At  this  point  arises  the  unanswerable  question 
of  what  should  be  the  function  of  the  state.  Upon 
what  principles  shall  the  sphere  of  state  activity 
be  decided  ?  The  once  generally  accepted  prin- 
ciple, that  the  state  should  not  do  for  an  individual 
or  group  of  individuals  what  they  could  equally 
as  well  do  for  themselves,  gives  us  no  great  aid  in 
deciding  the  question.  With  the  increasing  devel- 
opment of  democratic  ideas  the  state  has  come  to 

[7] 


INSURANCE  AND  THE  STATE 

be  considered  an  organ  for  the  expression,  protec- 
tion, and  development  of  social  needs  as  distin- 
guished from  individual  or  group  interests.  Nor 
is  the  state  to  be  solely  an  organ  for  serving  the 
present  generation,  but  it  is  more  and  more  to 
be  used  to  prepare  the  way  for  the  future  genera- 
tions. It  is  maintained  that  the  social  well-being 
to  be  furthered  by  the  state  is  therefore  something 
more  than  the  sum  total  of  the  individual  well- 
being  of  the  present  living,  and  that  even  if  the 
present  well-being  alone  is  considered,  a  unified 
activity  of  the  state  brings  greater  benefit  to  all 
than  the  same  activity  diversified  by  remaining 
under  the  control  of  private  individuals. 

New  fields  of  state  activity  are  continually 
being  found  with  that  increased  complexity  of 
society  which  calls  for  the  nicer  and  nicer  adjust- 
ment of  one's  conduct  towards  his  fellows  which 
can  only  be  secured  under  the  single  directing 
and  unifying  organ  of  society  —  the  state.  The 
fact  that  in  the  United  States  there  are  many  ob- 
stacles to  this  increased  activity  of  the  state,  such 
as  constitutions,  need  cause  no  great  concern. 
Such  obstacles  must  be  trivial  and  temporary 
when  a  long,  distinct  vision  of  society  is  taken. 
Already  the  people  are  forming  the  habit  of  amend- 

[81 


THE  CHARACTER  OF  INSURANCE 

ing  and  revising  constitutions  or  adopting  entirely 
new  ones  in  the  states,  and  as  they  more  and  more 
realize  their  sovereignty  they  will  fashion  their 
tools,  like  any  good  workman,  to  do  the  work 
which  they  wish  them  to  do.  So  far,  then,  as  they 
realize  that  a  constitution  and  the  laws  which  are 
made  under  it  are  but  expressions  of  the  will  of 
the  people,  so  far  will  they  change  their  past  ex- 
pressions to  suit  present  ideas.  Constitutions  and 
laws  therefore  present  but  temporary  obstacles 
to  the  assumption  or  even  monopolization  of  the 
insurance  business  by  the  state.  '\ 

It  may  now  be  inquired  if  the  business  of  in- 
surance is  of  a  kind  which  is  suitable  for  a  source 
of  private  gain ;  that  is  to  state,  is  it  a  business 
from  which  individuals  should  be  permitted  to 
take  profit  in  the  technical  sense  of  the  word  ? 
Or  is  it  a  business  of  such  social  importance  that 
its  costs  to  those  whom  it  serves  should  be  prime 
costs  ?  That  is,  should  the  outlay  for  the  service 
be  limited  to  wages  for  those  who  are  employed 
to  conduct  the  business  of  insurance  ?  Even  con- 
ceding a  monopoly  of  this  business  by  the  state, 
it  would  probably  not  mean  a  great  reduction  in 
the  number  of  wage  earners  who  are  now  employed 
in  the  business.  But  it  certainly  would  mean 

[9] 


INSURANCE  AND  THE  STATE 

that  the  business  of  insurance  would  afford  no 
opportunity  to  the  capitalist  for  the  employment 
of  capital  and  but  a  very  limited  opportunity 
for  the  landowner  to  secure  rent,  because  insur- 
ance under  government  operation  would  be  purely 
mutual  insurance,  or  if  it  should  be  administered 
on  a  basis  for  profit,  the  surplus  would  go  to  the 
state  treasury. 

Whether  it  is  or  is  not  a  suitable  business  for 
profit  must  be  determined  largely  by  two  con- 
siderations. First,  to  what  extent  is  the  indi- 
vidual free  to  deal  in  the  commodity  or  service  ? 
Second,  to  what  degree  is  the  element  of  risk  pres- 
ent whereby  unusual  skill,  foresight,  and  great 
ability  are  under  our  present  economic  system 
supposed  to  justify  one  in  taking  or  receiving  a 
large  return  in  the  nature  of  a  profit,  risk  interest, 
wages  of  management,  or  whatever  we  are  pleased 
to  call  this  unusual  fund  ? 

As  to  the  first  point,  we  have  but  to  consider 
again  the  nature  of  insurance.  It  is  but  a  method 
of  assuming  and  distributing  necessary  risks  to 
which  every  one  is  in  some  manner  exposed.  The 
fact  that  many  do  not  avail  themselves  of  the  in- 
surance principle  does  not  prove  that  they  are 
essentially  free  to  choose.  Indeed  they  have 

[10] 


THE  CHARACTER  OF  INSURANCE 

chosen.  The  risk  remains  whether  or  not  they 
choose  to  admit  its  existence.  Their  failure  to 
reduce  the  risk  by  joining  with  their  fellows  in 
applying  the  insurance  principle  means  that  their 
social  mind  lacks  development,  and  it  means 
further  that  their  fellows  ultimately  bear  a  large 
part  of  the  risk.  The  loss  of  a  life  is  usually  a  loss 
to  society,  not  only  because  of  the  potential  value 
of  the  life  itself,  but  also  because  of  the  withdrawal 
of  protection  from  those  dependent  upon  that 
life  for  support  and  preparation  for  efficient 
living.  The  loss  of  a  property  falls  immediately 
upon  the  owner,  but  it  is  also  a  destruction  of  so 
much  social  capital.  The  loss  of  time  by  sickness 
or  accidents  means  that  so  much  less  of  the  work 
of  the  world  is  done,  or  perchance  it  is  shunted 
upon  shoulders  already  heavy  with  work.  The 
individual  ought  not  to  be  free  to  choose  whether 
he  shall  increase  social  well-being  by  using  the 
insurance  principle,  even  though  it  be  true  that 
insurance  per  se  gives  but  a  very  indirect  benefit 
to  the  individual.  Its  first  and  fundamental 
characteristic  is  mutuality;  the  principle  of  each 
for  all  and  all  for  each.  If,  then,  the  idea  of  profit 
to  the  insured  is  excluded  by  the  very  nature  of 
insurance,  and  if  it  is  a  method  of  reducing  nee- 

[11] 


INSURANCE  AND  THE  STATE 

essary  risks  and  if  the  value  resulting  is  distinctly 
a  social  value,  should  individuals  be  permitted  to 
receive  a  profit  from  administering  it  ?  Paradoxi- 
cal as  it  may  appear,  it  is  the  insurance  officials 
who  unconsciously  argue  for  this  view.  This  is 
most  clearly  shown  in  the  taxation  laws  of  the 
various  states.  The  greater  number  of  insurance 
officials,  especially  those  connected  with  the  life 
insurance  companies,  oppose  the  taxation  of  in- 
surance on  the  ground  that  its  character  does  not 
justify  the  tax.  It  is  called  by  them  a  "tax  on 
thrift,"  yet  the  legislators  make  insurance  a 
source  of  considerable  revenue  for  the  state. 

As  to  the  second  point,  viz.  whether  there  is 
such  a  risk  present  in  conducting  the  business  as 
would  justify  the  taking  of  a  profit.  This  question 
has  been  answered  in  part  by  the  consideration 
of  the  basis  or  principles  upon  which  the  busi- 
ness is  conducted.  These  principles  have  been 
in  most  kinds  of  insurance  long  known  and  well 
understood.  The  results  of  many  years'  appli- 
cation of  the  principles  are  known.  The  data 
are  available,  and  in  most  cases  are  organized  or 
capable  of  being  organized,  so  that  no  great  ele- 
ment of  risk  is  present.  This  is  not  to  state 
that  perfection  has  been  reached  in  applying  these 

[12] 


THE  CHARACTER  OF  INSURANCE 

data,  but  certainly  with  our  present  knowledge 
there  is  no  excuse  for  dangerous  experiments. 
Mortality  and  morbidity  statistics  are  available 
and  are  becoming  more  accurate.  Marine  and 
fire  insurance  experience  extends  over  a  long 
series  of  years.  The  costs  of  insurance  are  well 
known,  or  at  least  we  know  that  a  certain  mini- 
mum amount  must  be  collected.  How  much  less 
might  be  sufficient  is  a  debatable  question,  but 
there  is  no  necessity  to  answer  that  question  in 
the  event  the  state  should  decide  to  monopolize 
the  business.  In  short,  the  application  of  the 
insurance  principle  presents  no  great  difficulties 
or  risks.  It  is  not  a  venture  upon  unknown 
seas. 


[13] 


CHAPTER  II 

STATE  INSURANCE  IN  PRACTICE 

IT  does  not  follow  from  the  preceding  descrip- 
tion of  insurance  that  great  ability  and 
skill  are  not  required  to  administer  the  business. 
Nothing  could  be  farther  from  the  truth.  Not 
only  is  great  organizing  ability  required,  but  also 
great  financial  ability  is  demanded  in  investing 
and  caring  for  the  enormous  trustee  funds.  It 
may  be  argued  that  it  is  in  connection  with  the 
investment  of  these  funds  that  the  element  of  risk 
appears  which  justifies  the  profit  to  the  individual. 
But  an  examination  of  the  interest  rate  assumed 
and  actually  earned,  together  with  the  course  of 
the  interest  rate  during  the  past  centuries  and  a 
study  of  its  probable  range  in  the  future,  removes 
any  great  doubt  on  this  point.  Very  few  of  those 
who  receive  either  interest  or  profit  from  the  in- 
surance business  would  be  bold  enough  to  main- 
tain that  this  was  a  return  either  for  the  risk 
they  had  assumed  or  for  their  great  foresight  in 

[14] 


STATE  INSURANCE  IN  PRACTICE 

investing  insurance  funds.  Before  considering 
in  detail  the  problems  of  state  insurance  of  each 
of  the  kinds  of  insurance,  a  description  of  what 
has  already  been  done  by  the  different  nations 
in  state  insurance  will  be  of  value. 

The  most  notable  case  of  state  insurance  is  that 
established  by  the  Italian  law  of  April  4,  1912. 
This  law  makes  life  insurance  a  state  monopoly. 
The  issuing  of  all  policies  of  life  insurance  is  in- 
trusted to  a  National  Institute  of  Insurance,  a 
department  of  the  state  to  which  the  treasury 
of  the  state  issues  the  money  necessary  for  its 
operation.  The  net  profit  of  operation  goes  to 
the  public  treasury  for  a  fund  to  provide  working- 
men  pensions.  However,  it  is  not  primarily  finan- 
cial in  its  purpose ;  for,  as  Minister  Nitti  insists, 
"the  essential  thing  is  not  to  obtain  revenue  for 
the  state,  but  to  render  life  insurance  popular 
with  the  classes  and  to  make  it  accessible  to  all." 
It  must  be  emphasized  that  whatever  profit  re- 
sults does  not  go  to  pay  the  normal  expenses 
of  the  state,  but  is  to  be  set  aside  in  toto  for  the 
specific  social  purpose  of  providing  pensions  for 
workingmen. 

It  is  to  be  especially  noted  that  the  law  applies 
only  to  life  insurance,  and  even  in  this  case  the 

[15J 


INSURANCE  AND  THE  STATE 

social  aspect  of  such  insurance  is  recognized  by 
exempting  the  following  classes  of  life  insurance 
organizations:  (a)  Provident  Institutions  au- 
thorized by  law  to  the  service  of  pensions  or 
annuities.  (6)  Banks  of  Providence  recognized 
by  royal  decree,  (c)  Mutual  societies  the  aim 
of  which  is  not  speculation  and  which  insure 
their  members  for  a  sum  not  in  excess  of  1000  lire 
or  pay  an  annuity  not  to  exceed  400  lire,  (d)  Pub- 
lic and  private  institutions  which  directly  grant 
pensions,  rewards,  or  aid  at  the  time  of  death  of 
their  employees,  (e)  Life  annuities  stipulated 
and  acceding  to  the  Articles  of  1789  and  follow- 
ing the  Civil  Code.  The  law  nullifies  all  con- 
tracts of  life  insurance  made  after  the  law  of 
1912  is  placed  in  effect  and  denies  a  hearing  in 
Italian  courts  on  insurance  contracts  made  in 
foreign  countries.  It  is  made  an  offense  for  a 
company  or  its  agents  to  solicit  life  insurance,  and 
in  case  this  is  done,  the  agent  is  fined,  the  contract 
is  nullified,  and  the  informer  is  given  a  part  of 
the  fine. 

All  tontine  and  annuity  companies  are  pro- 
hibited, and  the  present  business  of  such  com- 
panies, either  foreign  or  domestic,  must  be  liq- 
uidated. The  law  requires  each  company  having 

[16] 


STATE  INSURANCE  IN  PRACTICE 

insurance  policies  in  force  to  file  with  the  govern- 
ment a  detailed  statement  of  each  policy,  and  all 
such  policies  not  so  scheduled  are  declared  null 
and  void.  Each  policy-holder  is  requested  to 
see  that  the  company  so  declares  his  policy,  and 
if  the  company  has  not  done  this,  the  policy- 
holder  must.  It  has  been  decided  to  grant  a  cer- 
tain number  of  years  during  which  the  transfer 
from  private  to  state  insurance  may  take  place 
without  causing  too  much  damage.  This  inter- 
val also  gives  time  for  the  National  Institute 
to  prepare  itself  to  function  properly. 

The  following  principles  govern  the  relation- 
ship between  the  new  state  and  the  old  private 
insurance. 

(a)  No  indemnity  of  any  kind  will  be  given 
to  the  private  insurance  companies,  either  domes- 
tic or  foreign.  Italy  has  no  constitution.  All 
laws  are  constitutional,  and  the  Italian  courts 
have  no  choice  but  to  apply  the  law.  Foreign 
companies,  therefore,  can  have  no  indemnity 
granted  by  the  Italian  courts.  What  will  be  the 
result  of  the  request  which  has  been  made  by  some 
of  these  foreign  companies  to  their  departments 
of  state  to  take  up  the  subject  with  Italy  is  a 
matter  of  conjecture.  Such  a  question  might 

[171 


INSURANCE  AND  THE  STATE 

reach  the  Hague  Tribunal,  and  if  an  award  in 
favor  of  the  foreign  companies  were  granted,  an 
embarrassing  situation  might  arise.  If  foreign 
companies  were  indemnified,  certainly  the  Italian 
companies  should  also  receive  indemnities. 

(&)  During  a  period  not  to  exceed  ten  years 
existing  companies  may  continue  to  do  business 
under  certain  restrictions.  Some  of  these  re- 
strictions are  that  the  company  must  turn  over 
40  per  cent  of  every  risk  to  the  National  Institute ; 
within  thirty  days  after  writing  the  risk  the  com- 
pany must  send  to  the  Institute  a  full  description 
of  the  risk  and  give  it  an  opportunity  to  accept 
or  reject  the  risk.  If  the  Institute  accepts  the 
risk,  it  becomes  a  creditor  for  a  part  of  the 
premium  to  cover  that  part  of  the  risk  assumed. 

(c)  All  companies  foreign  or  domestic  may  call 
upon   the   Institute  to  assume   all   its   contracts 
of  insurance  written  previous  to  Dec.  31,  1911. 
Companies   continuing   business   under   the   ten- 
year  limit  can   surrender  their  business   at  any 
time.     The   Institute   must   accept   the   business 
if  the  proper  reserve  is  held  on  the  policies. 

(d)  If  contracts  are  not  surrendered,  they  must 
be  executed  the  same  as  if  there  was  no  state 
monopoly. 

[18] 


STATE  INSURANCE  IN  PRACTICE 

The  National  Institute  of  Life  Insurance  has 
a  legal  and  financial  autonomy.  It  is  a  public 
service  under  inspection,  with  provisions  to  ex- 
clude politics  from  its  operation.  It  has  its  own 
budget,  although  the  state  guarantees  the  obli- 
gations assumed.  The  capital  of  the  Institute 
is  exempt  from  taxation,  but  the  contracts  of 
insurance  are  taxed.  It  has  the  postal  and  tele- 
graph franchise.  In  addition  to  the  administra- 
tive officials  and  office  force,  agents  are  employed 
who  are  paid  on  a  commission,  proportional 
to  the  amount  of  the  business  secured.  All  per- 
sons actively  engaged  or  interested  in  politics 
are  forbidden  to  hold  any  administrative  posi- 
tions, and  in  addition  certain  qualifications  for 
the  particular  position  must  be  possessed.  The 
tenure  of  office  is  also  secured. 

Switzerland,  after  a  referendum  vote,  passed  a 
law  June,  1911,  which  provides  for  a  state  monop- 
oly of  insurance  against  accidents  and  sickness. 
In  addition  certain  cantons  have  government 
insurance  against  different  risks.  Some  of  them 
provide  insurance  against  fire.  This  insurance 
is  compulsory.  The  canton  of  Neuchatel  has 
public  life  insurance.  These  various  forms  of 
public  insurance  do  not,  in  most  cases,  provide 

[19] 


INSURANCE  AND  THE  STATE 

for  a  public  monopoly  of  the  business.  They 
compete  with  the  private  companies  for  business. 
In  several  of  the  German  states  public  insurance 
is  also  found,  but  in  no  case  is  a  monopoly  of  the 
business  established.  Bavaria,  for  example,  has 
public  insurance  against  fire,  live  stock,  and  storms. 
The  German  plan  of  workingmen's  insurance 
by  the  imperial  government  will  receive  considera- 
tion later.  In  Norway  public  insurance  against 
fire  and  accidents  is  found,  but  not  as  a  monopoly. 
In  Belgium  and  other  European  countries  other 
examples  of  public  insurance  are  found.  The 
recently  enacted  National  Insurance  Law  of 
England  needs  only  to  be  named  to  call  attention 
to  this  far-reaching  experiment  in  state  insurance. 
England  has  offered  for  many  years  industrial 
insurance  through  its  post-office  organization. 
Annuities  have  also  been  offered  for  many  years 
without  securing  large  results.  In  France  state 
insurance  is  one  of  the  most  important  questions 
of  the  day.  During  the  last  several  sessions  of 
the  Chamber  of  Deputies  bills  have  been  intro- 
duced organizing  a  state  monopoly  of  insurance, 
and  important  officials  of  the  various  governments 
of  late  years  have  declared  themselves  in  favor  of 
the  plan  so  soon  as  a  means  of  realizing  the  work 

[20] 


STATE  INSURANCE  IN  PRACTICE 

can  be  devised.  There  exists  already  public 
insurance  in  France  against  accidents  and  fire, 
but  these  are  without  a  monopoly.  In  some  of 
the  Australian  states,  especially  New  Zealand,  life 
insurance  by  the  state  is  provided,  but  here  also 
it  is  found  in  competition  with  private  companies. 
The  United  States  also  affords  various  examples 
of  state  insurance,  the  most  interesting  of  which  is 
probably  the  plan  recently  placed  in  operation 
in  Wisconsin.  The  law  passed  by  the  legislature 
of  1911  provides  for  the  sale  of  life  insurance 
policies  by  the  state,  beginning  Jan.  1,  1913.  The 
law  provides  for  a  life  fund  beyond  which  the 
state  is  not  responsible.  The  state  treasurer 
is  custodian  of  the  fund,  and  all  other  matters 
in  relation  to  the  sale  of  the  insurance  are  under 
the  supervision  of  the  commissioner  of  insurance. 
The  premiums  are  based  upon  the  American 
experience  table  of  mortality  with  interest  at 
3  per  cent.  The  net  premium  thus  provided  for 
has  added  to  it  as  a  loading  two  dollars  per  year 
per  thousand  dollars  of  insurance  and  "an  amount 
distributed  equally  through  each  of  the  possible 
premium  payments,  the  present  value  of  which 
shall  be  equal  to  one  sixth  of  the  present  value 
of  the  costs  of  insurance  on  the  basis  aforesaid  " ; 

[21] 


INSURANCE  AND  THE  STATE 

that  is,  one  sixth  the  present  value  of  the  net 
natural  premium  for  that  year's  insurance. 

The  factory  inspectors  of  the  state,  the  clerk 
and  treasurer  of  every  county,  town,  city,  and 
village,  and  even  state  banks  are  made  agents,  and 
it  is  the  duty  of  each  to  transmit  to  the  insurance 
departments  applications,  when  requested  to  do 
so.  The  commissioner  of  insurance  and  the  state 
board  of  health  pass  upon  all  applications  after 
a  medical  examination  by  a  local  physician  has 
been  made.  The  law  provides  for  the  accumula- 
tion of  a  surplus  which  is  made  up  of  50  per  cent 
of  the  net  profits  on  each  policy  for  the  first  year, 
and  thereafter  5  per  cent  less  for  each  succeeding 
year  until  the  ninth  year,  and  thereafter  10  per 
cent  of  such  profit  during  the  continuation  of  the 
policy.  The  interest  on  this  surplus  fund  also 
becomes  a  part  of  this  surplus  which  is  to  be  held 
"  to  meet  losses  from  unexpected  or  great  mortality, 
or  depreciation  in  securities  or  otherwise."  The 
remainder  of  the  profits  are  distributed  annually 
to  the  policyholder.  No  revenue  is  sought  by 
the  state,  but  the  expenses  of  transacting  the 
business  are  to  be  met  from  the  life  fund.  Any 
person  is  authorized  to  transmit  applications  for 
insurance  to  the  state  department,  for  which  a 

[22] 


STATE  INSURANCE  IN  PRACTICE 

fee  of  twenty-five  cents  is  paid.  Likewise  a  fee 
of  1  per  cent  is  paid  for  collecting  and  transmit- 
ting any  premium,  and  such  a  person  is  held  to  be 
the  agent  of  the  insured.  Similarly  the  individual 
may  transmit  his  own  application  or  premium  and 
retain  twenty-five  cents  or  1  per  cent  of  the 
premium.  Policies  of  life  insurance  are  issued 
under  most  of  the  ordinary  forms  sold  by  private 
companies,  but  are  in  a  sum  of  $500  or  multiples 
thereof  up  to  $1000  on  a  single  risk  until  the 
number  of  insurants  equals  1000,  to  $2000  until 
the  number  insured  reaches  3000,  and  then  not  in 
excess  of  $3000  on  a  single  life.  The  age  limits 
are  fixed  at  twenty  and  fifty  years.  It  will  thus 
be  observed  that  the  plan  provided  is  conservative. 

The  premium  rates  are  less  than  those  charged 
by  private  companies  for  the  same  kind  and  class 
of  policy.  This  is  especially  true  in  the  case  of 
endowment  policies,  where  the  difference  in  the 
short-term  endowments  is  as  much  as  $10.  In 
the  case  of  a  ten-year  endowment  at  age  thirty- 
five  the  loading  in  the  state  rate  is  only  $2.77. 
Other  aspects  of  the  plan  will  be  discussed  when 
the  detailed  problem  of  a  state  monopoly  of  life 
insurance  is  considered. 

The  Massachusetts  plan  of  Savings  Bank  In- 
[23] 


INSURANCE  AND  THE  STATE 


surance  is  not  a  pure  example  of  state  insurance, 
but  it  has  some  characteristics  of  state  insurance. 
Under  the  law  of  1907  savings  banks  under  cer- 
tain conditions  were  authorized  to  sell  contracts 
of  insurance  and  annuities,  the  former  granting 
indemnity  in  case  of  death  not  to  exceed  $500,  and 
the  latter  paying  in  any  year  not  more  than  $200. 
A  special  guarantee  insurance  fund  must  be  pro- 
vided for  the  above  purposes.  The  General  In- 
surance Guaranty  Fund  is  created  a  body  corpo- 
rate, the  affairs  of  the  corporation  being  managed 
by  a  board  of  seven  trustees  appointed  by  the 
governor  from  the  list  of  the  trustees  of  savings 
banks  and  insurance  banks.  Only  residents  of  the 
state  can  be  insured  under  this  law.  No  solicitors 
or  collectors  can  be  employed.  The  expenses 
of  the  actuarial,  medical,  and  other  services  are 
borne  by  the  state.  The  results  achieved  under 
the  law  are  indicated  by  the  following  table :  — 


YBAB 

No.  OP  SAVINGS  BANKS 
WITH  INSURANCE 
DEPARTMENTS 

No.  OP 
POLICIES 

AMOUNT  OP 

INSURANCE 

1908 

2 

282 

$114,953 

1909 

2 

2513 

992,761 

1910 

2 

3318 

1,367,363 

1911 

3 

5063 

1,956,038 

1912 

4 

6652 

2,528,809 

[24] 


STATE  INSURANCE  IN  PRACTICE 

These  banks  have  established  agencies  at  various 
places  in  the  state  in  savings  banks,  trust  com- 
panies, stores,  Y.  M.  C.  A.'s,  high  schools,  and 
memorial  institutes,  where  application  for  insur- 
ance may  be  made  and  premiums  paid.  There 
are  also  two  hundred  unpaid  agencies  in  mills  and 
factories  for  the  benefit  of  employees  only. 

The  total  premium  income  for  1911  was  $102,- 
832.27  and  the  total  disbursements  for  the  year 
$39,644.37,  of  which  $21,877.67  was  to  policy- 
holders.  This  sum  was  divided  as  follows :  $6513 
for  death  claims ;  $7117.71  as  dividends;  $5850.04 
as  surrender  values;  and  $2189.19  as  surrender 
values,  used  to  buy  paid-up  insurance.  The 
expenses  for  the  year  chargeable  against  the 
premiums  were  about  17.3  per  cent,  and  the  ratio 
of  expense  against  the  premiums  after  the  first 
year  was  about  14  per  cent.  Notwithstanding 
this  favorable  showing  and  notwithstanding  the 
numerous  opportunities  given  to  the  public  to 
purchase  the  insurance,  the  fact  that  only  four 
savings  banks  and  6652  persons  have  in  five 
years  used  the  plan  will  be  held  to  be  by  some 
strong  indication  of  the  final  failure  of  the  plan. 

The  foregoing  are  then  the  chief  examples  of 
state  insurance,  with  the  one  remaining  exception 

[25] 


INSURANCE  AND  THE   STATE 

of  the  state  insurance  for  industrial  accidents. 
The  European  countries  again  supply  many  ex- 
amples in  this  particular,  but  this  form  of  state 
insurance  is  also  being  rapidly  adopted  in  the 
states  of  the  United  States.  Probably  the  Ohio 
plan  is  typical  of  what  is  attempted. 

The  law  of  1911  created  a  state  insurance  fund 
for  the  purpose  of  granting  indemnity  to  injured 
workmen.  The  law  is  not  compulsory,  and  it 
affects  only  employers  who  employ  five  or  more 
operatives  regularly  in  the  same  business.  The 
expense  of  administering  the  fund  is  borne  by  the 
state.  If  an  employer  does  not  avail  himself 
of  the  provisions  of  the  law,  he  is  denied  setting 
up  as  a  defense,  in  case  of  a  suit,  the  defenses 
of  assumption  of  risk,  fellow  servant,  or  con- 
tributory negligence.  Compensation  is  provided 
in  the  case  of  all  injuries  received  in  the  course 
of  employment  without  regard  to  the  question  of 
negligence,  except  that  no  compensation  is  allowed 
for  an  injury  which  has  been  self-inflicted.  The 
compensation  received  in  case  of  injury  is  from 
$5  to  $12  per  week  unless  the  wage  is  less 
than  $5  per  week,  with  the  provision  that  com- 
pensation shall  not  continue  for  more  than  six 
years  and  that  the  total  sum  received  shall  not 

[26] 


STATE  INSURANCE  IN  PRACTICE 

exceed  $3750.  If  permanent  total  disability 
is  suffered,  similar  payments  are  made  during  the 
lifetime  of  the  injured  employee.  In  case  of 
death  the  dependents  of  the  workmen  are  paid 
certain  sums,  depending  upon  the  wage  received. 
The  fund  is  administered  by  a  board"  of  awards, 
which  is  given  very  large  powers.  The  employers 
pay  90  per  cent  of  the  premium  and  the  employees 
10  per  cent,  the  premium  being  based  upon  the 
accidents  of  the  industries  according  to  the  clas- 
sification made  by  the  board. 

As  amended  in  1912,  the  law  compels  the  em- 
ployer to  pay  all  the  premium  or  cost  of  the  in- 
surance. A  more  important  amendment  was  to 
make  it  practically  compulsory  for  all  employers 
of  five  or  more  workmen  to  insure  with  the  state 
board  rather  than  with  the  private  company. 
The  employer  still  has  the  privilege  of  refusing 
to  take  any  insurance,  but  if  he  does,  he  is  deprived 
of  setting  up  as  a  defense  any  of  the  old  common- 
law  defenses.  But  if  he  insures,  it  must  be  with 
the  state  department,  established  for  this  purpose. 
There  is  only  one  exception.  An  employer  or 
a  mutual  association  of  employers  may  provide 
the  indemnity  specified  in  the  law,  but  in  this 
event,  he  or  they  must  submit  to  strict  super- 

[27] 


INSURANCE  AND  THE   STATE 

vision  by  the  State  Board  of  Award.  A  bond 
for  the  security  of  the  payments  of  the  compen- 
sation must  be  given  to  the  Board,  and  at  all 
times  the  employer  or  the  association  must  sub- 
mit to  the  detailed  rules  laid  down  by  the  Board. 
In  the  case  of  self  or  mutual  insurance  a  contribu- 
tion must  be  made  to  the  surplus  fund  which  the 
Board  is  required  to  accumulate.  This  surplus 
fund  is  made  up  of  10  per  cent  of  all  premium  re- 
ceipts until  the  fund  reaches  $100,000  and  then 
5  per  cent  of  such  receipts  until  such  time  as  the 
Board  has  decided  that  the  surplus  is  sufficiently 
large. 

Another  important  provision  was  to  make  the 
insurance  compulsory  on  the  state,  county,  city, 
township,  incorporated  village,  and  school  district ; 
that  is,  it  is  compulsory  compensation  for  public 
as  well  as  private  employees. 

Rates  are  based  upon  a  classification  of  occupa- 
tions with  respect  to  their  hazards,  the  pay  roll, 
and  the  number  of  employees.  It  is  the  duty  of 
the  Board  to  ultimately  fix  and  maintain  the  low- 
est rates  possible  for  each  class  of  occupations, 
consistent  with  the  maintenance  of  a  solvent 
insurance  fund,  the  creation  and  maintenance  of 
a  reasonable  surplus.  Rates  are  adjusted  semi- 

[28] 


STATE  INSURANCE  IN  PRACTICE 

annually,  and  if  the  experience  in  an  industry  or 
a  plant  shows  that  an  unnecessarily  high  rate  has 
been  collected,  the  excess  in  it  is  credited  to  the 
future  premiums  due  from  the  employer. 


[29] 


CHAPTER  III 

SHOULD  THE  STATE  MONOPOLIZE  LIFE 
INSURANCE  ? 

IT  may  now  be  inquired  after  this  survey  of 
the  examples  of  state  insurance  as  to  the 
grounds  upon  which  such  activity  of  the  state 
may  be  based.  It  will  aid  to  a  better  understand- 
ing of  the  question,  if  the  consideration  is  taken 
up  under  the  following  three  divisions :  — 

(1)  What  considerations  should  cause  the  state 
to  assume,  either  in  competition  with  private  com- 
panies or  as  a  state  monopoly,  the  business  of  life 
insurance  ? 

(2)  Would  the  same  reason  apply  in  the  case 
of  fire  insurance  ? 

(3)  Would  the  same  reasons  apply  to  the  mis- 
cellaneous  lines  of  insurance,   especially  to  sick- 
ness and  industrial  accident  insurance  ? 

If  the  state  assumes  the  business  of  life  insur- 
ance, it  must  be  for  one  or  more  of  three  reasons :  — 

(a)  As  a  desirable  source  of  securing  revenue 
for  the  state. 

[30] 


STATE  LIFE  INSURANCE 

(6)  As  a  social  developmental  activity  whereby 
greater  numbers  may  benefit  from  an  applica- 
tion of  the  insurance  principle. 

(c)  As  a  method  of  completely  regulating  the 
business  without  the  primary  object  either  of  rev- 
enue or  of  extending  its  social  benefits. 

On  the  first  point  it  may  be  questioned  if  life 
insurance  is  a  proper  source  of  revenue  for  the 
state.  It  is,  as  has  been  shown,  a  means  of  pro- 
viding a  common  need.  It  is  an  indemnity  in 
part  for  the  loss  of  life.  It  can  be  neither  a 
speculation  nor  a  source  of  profit  for  him  who  buys 
it.  Its  possession  yields  to  him  no  income.  It 
is  property  without  revenue-yielding  power  in 
the  possession  of  the  holder,  although  this  charac- 
teristic is  lost  when  it  becomes  the  property 
of  the  beneficiary;  but  it  is  not  then  insurance. 
It  is  the  proceeds  of  insurance.  Whatever  rev- 
enue the  state  collects  is  collected  for  a  public 
purpose ;  that  is,  it  is  to  be  expended  in  furthering 
social  well-being  in  some  form.  Therefore  the 
collection  of  funds  from  the  sale  of  insurance 
would  logically  imply  that  these  funds  were  to 
be  expended  for  a  social  purpose,  not  of  equal  im- 
portance to  insurance,  but  superior  to  it. 

No  other  characteristic  of  political  thought  is 
[31] 


INSURANCE  AND  THE  STATE 

more  significant  at  present  than  the  remarkable 
growth  of  the  idea  that  the  state  is  an  institution 
of  the  people,  and  as  such  should  be  used  to 
further  the  interests  of  the  masses.  With  this 
growing  democratic  conception  it  is  difficult  to 
imagine  that  the  people  would  consent  to  the 
use  of  such  a  distinctively  social  institution  as 
insurance  for  the  purpose  of  financing  other  in- 
terests of  the  state.  In  the  United  States,  where 
practical  democracy  is  gradually  taking  the 
place  of  theoretical  democracy,  such  a  use  of  in- 
surance is  scarcely  conceivable.  A  democratic 
constituency  of  an  elected  representative  would 
not  consent  to  such  an  antisocial  use  of  insurance, 
and  because  they  are  a  popular  electorate,  a  power- 
ful weapon  for  enforcing  the  wishes  of  the  people 
would  be  in  their  possession  by  means  of  their 
voting  power. 

How  large  such  a  possible  revenue  would  be 
would  depend  upon  such  factors  as  the  rates 
charged  for  the  service,  and  the  outlays  for  con- 
ducting the  business.  In  1911  the  ordinary  Life 
Insurance  Companies  in  the  United  States  had  a 
capital  of  $46,712,523.  The  capital  stock  is  in 
many  cases,  as  in  Mutual  Companies,  only  that 
nominal  sum  which  is  required  by  the  state  laws. 

[32] 


STATE  LIFE  INSURANCE 

The  dividend  paid  on  this  capital  stock  was  4.3 
per  cent.  The  total  admitted  assets  were  $4,164,- 
491,688,  and  the  income  from  all  sources  during 
the  year  was  $836,160,804.  There  was  paid  out 
for  agents,  other  employees,  and  operating  ex- 
penses $165,614,119. 

The  dividends  paid  plus  the  reductions  in  this 
expense  sum  —  if  any  could  be  made  —  would 
make  up  the  possible  source  of  revenue  to  the 
state.  No  capital  stock  would  be  required  under 
state  insurance  because  no  dividends  would  be 
paid.  Whether  other  savings  could  be  effected 
will  be  a  topic  for  later  discussion. 

It  might  conceivably  be  argued  that  the  state 
would  derive  a  financial  gain  from  assuming  in- 
surance, in  that  a  market  could  be  made  for  its 
bonds.  The  insurance  business  is  one  which  de- 
mands long-time  investments.  The  state  has 
such  securities  for  sale.  In  reply  to  this  argument 
it  may  be  said  that  if  the  normal  competitive 
market  price  is  paid,  there  would  probably  be  no 
need  to  make  a  market  for  their  securities.  If 
more  than  the  market  price  is  paid,  this  would 
again  mean  the  using  of  insurance  for  the  advan- 
tage of  some  other  state  activity,  and  this,  it  is 
believed,  would  not  be  permitted  by  the  policy- 
D  [33] 


INSURANCE  AND  THE  STATE 

holders.  But  such  a  use  of  insurance  funds  is 
practically  not  possible.  Only  a  part  of  the 
securities  of  insurance  could  thus  be  invested, 
because  in  some  states  the  state  securities  are  not 
large  enough,  and  second,  because  they  would  not 
fall  due  at  such  frequent  intervals  as  would  be 
adequate  to  pay  the  constantly  maturing  policies. 
There  is  frequently  great  concern  expressed  about 
the  large  accumulations  of  insurance  companies. 
Many  imagine  it  is  a  concentration  of  wealth  in 
the  control  of  private  individuals  to  be  feared. 
Many  honest-minded  men  consider  these  large 
aggregations  of  wealth  either  a  proper  subject 
for  heavy  taxation  or  a  great  opportunity  for  the 
state  to  derive  profit  by  directly  operating  the 
business.  They  do  not  realize  that  these  large 
sums  represent  only  the  small  contributions  of 
millions  of  people,  and  that  the  funds  are  liabil- 
ities in  the  hands  of  trustees,  who  should  receive 
no  profit  from  the  use  of  strangers'  funds,  but  only 
a  wage  for  their  services  in  caring  for  these  funds. 
State  Insurance  may  be  urged  on  the  ground 
of  its  social  significance.  That  is  to  say,  the  state 
will  go  into  the  business  for  social  developmental 
purposes,  and  not  for  the  sake  of  revenue.  It  is 
undoubtedly  this  purpose  which  is  commanding 

[34] 


STATE  LIFE  INSURANCE 

most  attention  and  which  is  chiefly  responsible 
for  the  application  of  the  scheme  in  the  different 
examples  that  have  been  described.  The  plan 
appeals  very  strongly  to  the  social-minded.  Many 
have  begun  to  realize  the  far-reaching  possibilities 
of  insurance  as  a  social  institution,  and  are  eager 
to  extend  its  application  by  seeking  the  influence 
of  the  state  or  demanding  that  it  use  its  coercive 
power. 

It  is  undoubtedly  true  that  the  greatest  enemy 
of  life  insurance  is  man's  unwillingness  to  insure. 
But  by  what  means  can  this  unwillingness  be 
removed  ?  What  inducements  for  insurance  can 
be  supplied  which  are  not  now  present  ? 

Two  methods  of  increasing  the  number  of  the 
insured  stand  out  as  prominent,  and  practically 
include  all  others  :  — 

First,  by  reducing  the  cost  of  insurance. 

Second,  by  educating  the  people  to  a  more 
general  understanding  of  insurance,  and  an  appre- 
ciation of  the  Cervices  which  it  can  render  them. 
If,  however,  insurance  could  be  reduced  in  cost, 
even  with  the  present  understanding  of  it,  a  great 
increase  in  the  number  of  the  insured  would, 
without  doubt,  result. 

What,  then,  is  the  prospect  that  under  a  system 
[35] 


INSURANCE  AND   THE  STATE 

of  state  insurance  the  cost  would  be  reduced  and 
thus  the  purpose  of  its  assumption  by  the  state 
would  be  secured,  in  that  insurance  would  be 
extended  in  its  application.  This  calls  for  an 
analysis  of  insurance  costs  which  cannot  give, 
however,  a  conclusive  answer  to  the  question. 
For  purpose  of  analysis  the  costs  of  insurance 
may  be  divided  into  prime  costs  and  operating 
costs.  The  prime  costs  may  be  investigated 
as  a  cost  fixed  by  the  mortality  rate  and  the 
interest  rate,  and  the  operating  costs  may  be 
divided  into  the  two  divisions  of  costs  of  secur- 
ing the  business,  or  the  agency  costs,  and  costs 
of  operating  the  business,  or  the  overhead  costs. 
As  to  mortality  costs  little  need  be  said.  The 
state  would  have  no  better  source  of  determining 
its  mortality  charge  than  the  companies  now  have, 
and  private  companies  have,  under  competitive 
conditions,  quite  as  much  to  gain  from  taking 
advantage  of  any  improvements  in  mortality 
as  the  state  would  have.  That  is  to  say,  if  any 
one  company  knew  it  could  safely  reduce  its  pure 
mortality  charge,  it  would  usually  be  quite  will- 
ing to  do  so,  for  the  very  powerful  effect  it  would 
have  in  bringing  to  it  new  business  by  means 
of  a  reduction  in  costs  to  policyholders.  The 

[36] 


STATE  LIFE  INSURANCE 

mortality  table  now  in  general  use  in  the  United 
States  is  the  American  Mortality  Table,  drawn 
up  in  1869.  It  was  based  on  a  small  amount 
at  risk  and  is  redundant,  but  this  redundancy  is, 
to  a  very  large  degree,  discounted  by  the  select 
and  ultimate  or  preliminary  term  methods  of 
writing  policies  and  the  dividend-paying  prac- 
tice of  the  companies.  In  any  case  this  table 
is  the  most  accurate  which  is  now  available.  It 
is  the  one  which  is  prescribed  for  use  in  the  state 
regulations  of  ordinary  life  insurance,  and  the 
one  which  has  been  adopted  in  the  state  insur- 
ance plan  in  Wisconsin.  An  investigation  is  now 
started  which  will  result  in  a  new  mortality  table, 
but  whatever  its  showing  may  be,  the  policy- 
holders  as  a  class  will  not  be  greatly  benefited. 
It  is  well  to  have  a  new  table,  for  insurance  will 
be  made  more  scientific,  but  it  cannot  affect 
materially  the  question  of  private  versus  state 
insurance.  It  will  simply  show  to  a  certain  de- 
gree the  effect  of  the  forces  which  have  tended 
to  improve  mortality.  The  chief  of  these  forces 
are  the  more  intelligent  selection  of  risks  for  in- 
surance and  the  better  sanitary  conditions  of  liv- 
ing as  a  result  of  advancing  knowledge  of  the 
problems  of  health.  Nor  need  much  be  stated 

[37] 


INSURANCE  AND  THE  STATE 

in  regard  to  the  interest  rate  as  it  affects  the 
problem  of  state  and  private  insurance.  The 
state  has  no  mysterious  power  by  which  it  can 
affect  the  interest  rate.  The  American  companies 
have  most  of  their  business  on  a  3  per  cent,  3^ 
per  cent,  or  4  per  cent  interest  basis ;  that  is,  they 
assume  they  will  be  able  to  earn  such  an  interest 
throughout  the  time  of  the  contract.  It  is  true 
that  most  of  the  companies  are  earning  at  present 
a  rate  in  excess  of  these  rates,  but  this  surplus 
earning  is  also  either  discounted  or  returned  to 
the  policyholder.  The  average  interest  rate 
earned  in  1911  was  4.6  per  cent.  In  any  event 
it  is  not  probable  that  any  state  would  transact 
the  life  insurance  business  on  a  higher  interest 
basis,  nor  do  the  present  plans  of  state  insurance 
assume  a  higher  rate. 

It  may  be  argued  that  a  combination  of  the 
business  of  all  companies  into  one  business  under 
the  state  would  secure  better  averages  in  mortality 
and  interest.  Any  one  conversant  with  the  theory 
of  insurance  knows  that  the  present  business  of 
all  well-established  companies  gives  ample  oppor- 
tunity for  the  safe  working  of  the  law  of  average, 
both  as  to  the  mortality  rate  and  the  interest  rate. 
It  would  therefore  appear  reasonably  certain 

[381 


STATE  LIFE  INSURANCE 

that  the  state  would  not  be  able  to  effect  any 
material  saving  either  from  the  mortality  or  in- 
terest charges.  Hence  from  these  sources  it 
could  not  reduce  the  cost  of  insurance,  thereby 
making  it  more  attractive  and  salable  to  greater 
numbers,  which  is  the  particular  proposition  that 
is  now  being  considered. 

It  is  possible,  as  some  contend,  that  under  state 
insurance  greater  equity  as  regards  classes  of  the 
insurable  might  be  secured  by  minor  adjustments 
of  the  above  charges.  That  is,  a  more  complete 
analysis  of  the  mortality  experience  of  different 
classes  and  the  interest  earnings  on  the  policies 
of  these  different  classes  would  result  in  an 
adjustment  of  these  charges.  This  result  is 
possible,  but  it  must  be  understood  that  this 
would  mean  a  higher  charge  for  some  if  it  meant 
a  lower  charge  for  others.  Insurance  cannot  be 
argued  as  individually  just.  It  does  not  concern 
itself  with  an  individual,  but  with  large  numbers 
of  individuals.  It  is  a  mutual  arrangement  whose 
results  are  always  collectively  fair  and  just.  The 
old  maxim,  "tha.t  each  tub  should  stand  on  its 
bottom, "  has  no  application  in  insurance.  There 
is  nothing,  however,  to  prevent  the  above  adjust- 
ments from  being  made  by  state  regulation  under 

[39] 


INSURANCE  AND  THE  STATE 

a  system  of  private  insurance,  if  they  are  de- 
sirable and  possible.  The  failure  to  devise  a 
more  equitable  plan  for  distributing  dividends 
as  regards  classes  of  policyholders  and  the  heavy 
loading  of  the  net  premium  on  some  classes  of 
policies  greatly  reflect  on  the  scientific  character 
claimed  for  insurance.  The  contribution  plan 
of  distributing  dividends,  namely,  that  each 
policy  should  share  in  the  earnings  in  the  propor- 
tion that  it  has  contributed  to  these  earnings, 
is  yet  far  in  many  cases  from  actual  realization. 

Partly  as  a  result  of  the  investigations  of  the 
insurance  business  hi  1905  and  the  succeeding 
years,  and  partly  as  a  result  of  the  voluntary  acts 
of  some  companies,  .policyholders  secured  a  re- 
turn of  dividends  which  previously  had  gone  to 
other  persons.  Companies  can  now  be  but  little 
criticized  because  they  do  not  return  these  over- 
charges to  policyholders.  Indeed  the  criticism 
would  be  more  pertinent  to  say  that  an  undue 
return  is  often  made  to  some  classes  of  policy- 
holders.  One  of  the  future  improvements  in 
insurance  either  to  be  adopted  by  the  companies 
themselves  or  forced  by  the  state  is  a  greater 
degree  of  equity  as  regards  groups  in  the  returns 
or  dividends  to  policyholders.  Some  companies 

[40] 


STATE  LIFE  INSURANCE 

are  now  distributing,  in  the  form  of  dividends, 
earnings  which  could  never  have  been  earned 
by  the  premium  which  the  policyholder  paid  who 
receives  the  dividends.  While  it  is  true  that 
insurance  can  never  be  administered  as  a  purely 
individual  matter,  yet  this  limitation  or  charac- 
teristic of  it  does  not  excuse  the  unduly  high  or 
low  final  costs  to  some  groups  of  policyholders 
which  now  exist.  Dividends  are  being  paid  on 
first-year  premiums  which  must  come  from  the 
earnings  on  old  policyholders'  premiums. 

If  the  prime  costs  of  mortality  and  interest  do 
not  afford  a  good  prospect  of  being  reduced  under 
a  system  of  state  insurance,  what  prospect  of 
reduction  exists  in  the  case  of  the  costs  of  securing 
and  operating  the  business  ?  It  may  be  noted  at 
once  that  it  is  from  these  sources  that  the  sup- 
porters of  state  insurance  expect  to  make  great 
savings  and  hence  to  make  insurance  cheaper  and 
therefore  more  popular.  The  first  part  of  the 
question,  viz.  the  costs  of  securing  the  business, 
practically  means  the  cost  of  having  agents  to 
solicit  the  insurance,  and  the  saving  to  be  effected 
must  result  either  from  doing  away  with  agents  or 
reducing  the  amounts  paid  to  them.  We  are  not 
without  the  benefit  of  experience  on  this  point. 

[41] 


INSURANCE  AND  THE  STATE 

Attempts  have  been  made  in  a  number  of  cases  to 
transact  insurance  without  agents,  and  the  results 
in  each  case  have  not  so  far  justified  the  policy, 
so  far  as  extending  the  social  benefits  of  insurance 
would  be  accomplished.  One  of  the  best  examples 
of  this  plan  is  that  of  the  Equitable  Assurance 
Company  of  London.  This  company  has  been  in 
existence  over  one  hundred  and  fifty  years,  and 
for  nearly  seventy  years  its  advance  has  been  a 
retreat.  It  has  about  $25,000,000  assets  as  a 
result  of  its  century  and  a  half  of  existence  in  the 
greatest  center  of  population  in  the  world.  It 
has  less  than  two  thirds  as  much  insurance  in 
force  as  any  one  of  several  American  companies 
accumulate  in  one  year.  Attempts  have  been 
made  to  sell  insurance  by  extensive  systems  of 
advertising,  but  none  of  these  attempts  has 
had  such  success  as  would  warrant  the  complete 
adoption  of  such  a  plan  for  all  insurance.  Insur- 
ance is  a  service,  and  not  a  commodity  which  can 
be  sold  direct  from  producer  to  consumer.  The 
people  do  not  yet  understand  insurance  and  its 
benefits.  There  are  a  large  number  deficient 
either  in  a  proper  conception  of  their  duties  to 
themselves  and  their  dependents  or  in  a  lack  of 
will  power  to  carry  out  this  duty.  Probably  not 

[42] 


STATE  LIFE  INSURANCE 

10  per  cent  of  the  business  that  is  placed  upon  the 
books  of  insurance  companies  comes  by  voluntary 
acts  of  the  insured.  The  individual  must  be 
solicited,  either  to  inform  him  what  his  duty  is  or 
to  persuade  him  to  do  his  known  duty.  It  is  a 
bold  venture  to  attempt  at  the  present  stage  of 
insurance  knowledge  to  sell  insurance  without 
solicitors,  and  few  of  the  state  plans  of  insurance 
propose  it.  Very  few  persons  who  have  had  practi- 
cal experience  in  the  business  of  insurance  indorse 
such  a  plan.  As  greater  knowledge  of  insurance 
is  possessed  by  the  people,  the  possibility  of  suc- 
cess of  such  a  plan  may  be  greater.  It  is  some- 
times argued  that  agents  would  be  found  unneces- 
sary if  all  companies  would  abandon  the  plan  of 
using  agents.  This  is  to  say,  that  competition  is 
alone  responsible  for  the  existence  of  agents. 
Such  a  contention  implies  a  belief  that  people 
know  the  benefits  of  insurance  and  will  avail 
themselves  of  these  benefits. 

It  may,  however,  be  urged  that  a  saving  may  be 
effected  under  state  insurance  by  reducing  the 
amounts  paid  for  soliciting  the  business,  if  not  by 
doing  away  with  agents  entirely.  This  conten- 
tion implies  that  agents  are  now  paid  unnecessarily 
high  wages.  In  1911  there  was  paid  in  salaries, 

[43] 


INSURANCE  AND  THE  STATE 

commissions,  and  traveling  expenses  by  the  ordi- 
nary life  insurance  companies  $94,277,144.  But 
there  is  a  monopoly  neither  of  supply  nor  demand 
to  fix  price.  If  agents  are  highly  rewarded,  then 
this  opportunity  should  attract,  under  the  pre- 
vailing conditions  of  free  competition,  a  large 
number  of  those  who  desire  to  secure  this  high 
wage.  The  insurance  companies  are  always  will- 
ing and  anxious  to  secure  good  agents.  The 
opportunity  to  earn  the  assumed  high  wage  is 
present  in  the  great  number  of  the  uninsured  or  the 
insured  who  can  be  persuaded  to  purchase  more 
insurance.  Young  men  are  free  to  choose  the 
business  of  soliciting  insurance  equally  among 
many  other  employments.  Yet  there  is  a  dearth 
•  of  insurance  agents.  If  it  be  replied,  that  there 
are  few  who  are  qualified  for  the  work,  that  is, 
that  a  natural  monopoly  of  supply  exists,  then  it 
must  be  admitted  that  those  employed  earn  their 
wage.  Nor  is  there  any  reason  to  suppose  that 
under  state  insurance  the  present  agents  would 
voluntarily  work  for  a  less  wage.  Itjs  therefore 
difficult  to  discover  any  great  saving  in  costs  of 
securing  the  business  under  a  system  of  state  insur- 
ance, so  long  as  human  nature  remains  as  it  is  and 
so  long  as  general  ignorance  prevails  regarding  the 

[44] 


STATE  LIFE  INSURANCE 

benefits  of  insurance.  How  rapidly  these  present 
conditions  will  be  changed  no  one  can  say,  and 
hence  the  potential  economics  to  be  effected  in 
thi^  particular  remain  unknown. 

Insurance  officials  and  agents  sometimes  justify 
the  existence  of  agents  and  the  sums  paid  to  them 
on  the  ground  that  the  commissions  paid  represent 
an  investment  and  a  necessary  investment,  by 
the  old  policy  holders.  Whether  this  claim  can  be 
justified  or  not  depends  upon  two  points.  First, 
has  the  particular  company  which  the  agent 
represents  secured  sufficient  business  to  secure  the 
average  results  from  mortality  and  interest  invest- 
ments ?  that  is,  is  there  sufficient  business  for  the 
law  of  average  to  operate  ?  Second,  does  an 
increasing  business  per  se  bring  a  decrease  in  cost  ? 
As  to  the  first  point,  it  should  be  understood  that 
the  old  policyholder  has  no  interest  in  having 
new  business  secured  if  he  is  securing  the  benefits 
of  the  law  of  average.  However  much  others  may 
benefit  from  being  brought  into  the  company  and 
securing  the  advantages  of  insurance,  the  old 
policyholder  is  not  concerned  except  as  a  philan- 
thropically  minded  individual.  It  is  true,  addi- 
tions should  be  made  to  keep  in  operation  this 
law  of  average  in  mortality  and  investments,  but 

[45] 


INSURANCE  AND  THE  STATE 

the  agency  force  of  most  well-established  com- 
panies are  doing  much  better  than  this.  As  to  the 
interest  which  the  old  policyholder  has  in  securing 
new  business  because  it  may  mean  a  reduction  in 
cost,  that  is  the  following  subject  for  investigation. 
There  remains,  then,  this  other  source  from  which 
a  saving  might  be  secured  under  state  insurance, 
viz.  the  costs  of  operation.  It  is  from  this  source 
that  many  who  favor  state  insurance  think  great 
economies  can  be  secured.  In  1911  there  was  paid 
for  operating  or  overhead  expenses  about  $70,000,- 
000  from  an  income  receipt  of  $836,160,804,  which 
is  about  8  per  cent.  The  origin  of  the  proposed 
economies,  it  is  argued,  will  arise  from  the  fact 
that  in  place  of  many  competing  companies  with 
numerous  administrative  officials  and  clerks, 
occupying  many  expensive  buildings,  there  will  be 
one  company  —  the  state  —  with  a  limited  num- 
ber of  officials  and  occupying  but  one  building. 
This  contention  demands  careful  study,  not  only 
as  to  the  general  assumption  upon  which  it  rests, — 
viz.  that  the  insurance  business  is  one  subject  to 
the  law  of  decreasing  cost,  —  but  also  as  to  the 
extent  that  savings  can  be  made  from  specific 
sources,  such  as  a  reduction  in  rent  and  salaries 
for  expensive  administrators. 

[46] 


STATE  LIFE  INSURANCE 

It  may  be  inquired  if  the  insurance  business  fol- 
lows the  principle,  that  as  the  number  of  items  or 
units  are  produced  —  which  in  insurance  means 
policies  sold  —  the  cost  per  unit  decreases.  In  the 
following  table  is  given  the  result  of  grouping  into 
classes  according  to  the  amount  of  new  business 
written  in  the  year  1911,  the  one  hundred  and 
forty-one  leading  insurance  companies  doing  busi- 
ness in  the  United  States. 

The  percentage  of  the  average  expenses  both  to 
the  average  new  business  written  and  to  the  aver- 
age premium  receipts  is  given,  but  the  figures  in 
column  (g)  are  more  significant  than  those  in  col- 
umn (/).  The  value  of  an  average  is  always 
limited  by  the  numbers  upon  which  it  is  based, 
but  it  is  submitted  that  the  number  of  companies 
in  each  of  the  classes  is  sufficient  to  give  a  trust- 
worthy basis  upon  which  the  different  averages 
are  calculated.  The  high  average  of  the  group 
writing  new  business  under  $1,000,000  is  to  be 
explained  by  the  fact  that  this  group  is  made  up 
largely  of  new  companies  which  are  establishing 
themselves  as  going  concerns,  and  consequently 
the  initial  expenses  are  high.  This  fact  also  affects 
somewhat  the  group  writing  new  business  amount- 
ing between  one  and  five  million.  It  is  significant 

[47] 


INSURANCE  AND  THE  STATE 


M 


g  3  S  5  S 

§•<  £  K  J' 
B  *  Jl  £  « 


§ig*g 

g^gsg' 


-4H 


2  g  S 
«  is  w 


&      o 

*    0 


M     i-H    Tt<     l^»    IO  -^ 

10  «o  co  co  10  t^  ej 

i-lOO'TjtQOr-lOO 

tNTio"^-r^-rco"co"(Nco" 

O    »~^    O^    ^    OO    Is*  'fl 

I-H  CM  o  co          a 

^H"   N 

_"_          1 

CO    O    t*~    "^    CO    00    O 

CO    O    CO    IO    CO    C^    O 

CO^    Iti     r*     i-T    tC    {C    O~ 

CO     CM     CO     Oi    CO  CO 

co  co  o  i>  o 

CO"    OO"    IO~    r-T    -^T  ^ 

a 
Q 

O    iO    00    CO    CM    O    CO 

'ooi-ico-^oco          "A 

i-t_     <X_    <O      rH_    O_    CO_  o 

cocot>^co"oo^-rco"co" 
oococo-«i<ooi>t~-co 

CM    O    CO    t^-    1-1    O5    O 

~  <*  ™  ®  s"  S       "3 

! 


O    t-    rH    cN 

10     (M     ^H      ^H 


o 


-c.  o  o  o 


[48] 


1§ 


o  o  o_ 


io  o 


STATE  LIFE  INSURANCE 

that  this  table  shows  a  decrease  in  average  ex- 
penses to  average  premium  receipts  as  the  amount 
of  business  written  increases.  This  is  not,  how- 
ever, a  final  proof,  as  will  be  noted  later,  that  the 
insurance  business  is  subject  to  the  principle  of 
decreasing  cost,  or  at  least  it  does  not  prove  that 
the  business  can  be  increased  indefinitely  with  an 
accompanying  decreasing  cost.  However,  an  addi- 
tional and  better  test  of  the  relation  of  expense  to 
the  increase  and  amounts  of  business  may  be 
applied,  as  shown  in  the  following  two  tables. 
In  Table  II  the  twenty-three  leading  companies 
are  taken  and  grouped  according  to  the  increase  in 
their  premium  receipts  during  a  decade,  with  a 
statement  of  the  decrease  in  the  classes  of  expenses 
and  the  total  expense.  If,  then,  from  this  table 
the  average  decade  decreases  in  total  expense  for 
the  given  groups  are  calculated,  the  following 
results  are  given.  For  the  companies  increasing 
their  premium  receipts  less  than  one  million  during 
the  decade,  2.52  per  cent;  for  the  one  to  two 
million  group,  4.52  per  cent ;  for  the  two  to  three 
million  group,  2.67  per  cent;  for  the  three  to 
four  million  group,  1.83  per  cent;  for  the  four  to 
five  million  group,  7.65  per  cent;  for  the  five 
to  six  million  group,  4.87  per  cent;  for  the  six 
M  [49] 


INSURANCE  AND  THE  STATE 


TABLE  II 


COMPANIES 

YEARS 

GROSS 
PREMIUM 
RECEIPTS 

PERCENTAGE  TO 
PREMIUM 

PERCENTAGE  OF 
TOTAL  EXPENSES  IN- 
CLUDING TAXES  TO 
PREMIUM  RECEIPTS 

Ot  Com- 
missions 
and 
Agency 
Ex- 
penses 

Of  Ad- 
minis- 
trative 
Ex- 
penses 

1  MILLION  OK  LESS  IN- 

CBEASE  IN  PREMIUMS 

1910 
1901 

2,387,150 
2,173,932 

9.70 
12.03 

5.87 
5.75 

20.38 
21.10 

Conn.  General 

1910 

1,573,092 

14.20 

6.57 

23.39 

1901 

608,275 

16.38 

9.77 

28.39 

Manhattan      .... 

1910 

2,199,371 

10.44 

12.86 

41.34 

1901 

2,016,325 

19.32 

11.20 

43.18 

Pittsburgh  Life  &  Trust 

1910 

2,639,542 

7.40 

8.44 

27.13 

1901 

2,421,699 

21.42 

12.67 

43.25 

Union  Mutual     .     .     . 

1910 

2,220,479 

11.45 

8.85 

24.22 

1901 

1,716,298 

23.21 

12.11 

38.57 

1    TO    2    MILLION   IN- 

CREASE 

Conn.  Mutual      .     .     . 

1910 

6,122,457 

10.60 

5.55 

24.52 

Germania  

1901 
1910 
1901 

5,024,351 
5,284,473 
3,450,115 

8.38 
16.26 
16.63 

6.62 
6.78 
7.78 

27.68 
25.84 
28.31 

National  Life      .     .     . 

1910 

5,814,575 

13.49 

4.83 

21.69 

Home    ...... 

1901 
1910 
1901 
1910 

4,133,896 
3,588,928 
2,239,523 
5,034,779 

17.35 
13.22 
18.84 
11.35 

5.47 
7.75 
9.13 
5.02 

27.28 
24.06 
32.42 
19.55 

State  Mutual       . 

1901 

3,364,226 

14.22 

5.94 

23.58 

2   TO    3    MILLION    IN- 

CREASE 
./Etna     ...... 

1910 
1901 
1910 
1901 

10,370,013 
7,675,461 
4,590,123 
2,523,979 

11.89 
12.96 
14.59 
14.67 

5.78 
7.59 
6.50 
10.11 

22.44 
23.85 
24.67 
28.61 

Phcenix       

[50] 


STATE  LIFE  INSURANCE 


TABLE  II.—  Continued 


COMPANIES 

YEARS 

GROSS 
PREMIUM 
RECEIPTS 

PERCENTAGE  TO 
PREMIUM 

PERCENTAGE  OP 
TOTAL  EXPENSES  IN- 
CLUDING TAXES  TO 
PREMIUM  RECEIPTS 

Of  Com- 
missions 
and 
Agency 
Ex- 
penses 

Of  Ad- 
minis- 
trative 
Ex- 
penses 

3   TO   4    MILLION   IN- 
CREASE 
Mass.  Mutual     .     .     . 

New  England  Mutual  . 
Prov.  Life  and  Trust    . 
Travelers    

1910 
1901 
1910 
1901 
1910 
1901 
1910 
1901 

8,947,788 
5,133,843 
7,330,336 
4,231,685 
8,448,518 
5,485,068 
7,107,477 
3,593,938 

11.35 
13.68 
12.41 
11.31 
10.62 
9.65 
13.60 
13.51 

5.49 
6.31 
5.11 
7.95 
8.17 
4.98 
6.04 
6.27 

19.19 
22.25 
21.24 
23.69 
21.31 
19.19 
21.93 
25.54 

4   TO   5    MILLION    IN- 
CREASE 
Equitable  .     .     .     •     . 

1910 
1901 
1910 
1901 

51,027,173 
45,463,740 
52,106,429 
47,811,869 

12.87 
14.67 
9.23 
19.37 

4.56 
6.78 
4.99 
6.27 

20.40 
24.45 
17.25 
28.50 

Mutual       ..... 

6   TO   6    MILLION    IN- 
CREASE 
Union  Central     .     .     . 

1910 
1901 

10,424,600 
5,340,670 

12.45 
15.26 

4.66 
9.61 

22.21 
27.08 

6  TO   10  MILLION  IN- 
CREASE 
Mutual  Benefit   .     .     . 

Penn  Mutual       .     .     . 

1910 
1901 
1910 
1901 

19,632,149 
10,839,495 
17,858,958 
8,830,040 

11.41 
10.35 
12.90 
15.65 

5.28 
6.40 
4.12 
5.93 

19.48 
20.13 
20.46 
26.39 

OVER  10  MILLION  IN- 
CREASE 
N.  Y.  Life  

Northwestern  Mutual  . 

1910 
1901 
1910 
1901 

79,547,606 
54,435,814 
38,743,935 
22,609,544 

8.83 
17.07 
10.79 
11.88 

3.60 
6.46 
3.67 
4.25 

14.24 
25.35 
17.12 
19.73 

[51] 


INSURANCE  AND  THE  STATE 

to  ten  million  group,  3.29  per  cent;  and  for  the 
over  ten  million  group,  6.85  per  cent.  If,  how- 
ever, it  is  objected  that  a  grouping  according 
to  increase  in  premium  receipts  with  reference  to 
the  expenses  is  not  a  test  of  the  relation  of  ex- 
pense to  increase  in  business  because  of  the  fact 
that  a  small  company  may  show  an  enormous 
increase  in  premium  receipts  during  the  decade, 
while  a  large  company  may  show  a  small  increase, 
and  because,  further,  that  a  particular  company 
may  have  sold  a  large  number  of  large  premium 
policies,  such  as  endowments,  which  would  not 
mean  unduly  large  proportional  increase  in  amount 
of  insurances  in  force,  the  following  statement 
may  be  given  of  the  business  of  the  twenty-one 
leading  companies  for  the  decade  1901-1910. 

Six  companies  had  an  average  business  in  force 
for  the  decade  of  less  than  $100,000,000,  and  in 
this  group  the  average  decrease  in  the  expenses 
was  7.35  per  cent.  Eleven  companies  had  an 
average  business  in  force  between  $100,000,000 
and  $500,000,000,  and  the  average  decrease  in  their 
expense  was  3.64  per  cent.  Four  companies  had 
an  average  business  in  force  of  over  $500,000,000, 
and  the  average  decrease  in  their  expense  was 
7.25  per  cent. 

[52] 


STATE  LIFE  INSURANCE 

As  reflecting  some  light  on  the  relation  of  ex- 
pense to  increased  business  the  following  table 
may  be  given  for  the  twenty-five  leading  life 
insurance  companies  for  the  total  business  of  four 
years. 

A  study  of  this  table  gives  some  support  to  the 
contention  that  the  efficiency  of  private  insurance 
is  increasing.  Column  (4)  indicates  that  the 
gross  cost  for  the  larger  volume  of  business  in  1910 
was  less  than  for  the  smaller  volume  of  1907,  and 
column  (5)  indicates  that  for  the  same  amount 
expended  in  1907  and  1910,  almost  $500  more  of 
new  business  was  secured. 

Yet  none  of  these  tables  gives  an  answer  to  the 
question,  would  the  state  be  able  to  reduce  greatly 
the  expenses  of  insurance,  because  it  would  com- 
bine the  business  of  all  the  companies  ?  Even 
granting  that  the  tables  give  some  support  to  the 
contention  that  a  greater  volume  of  business  may 
be  accompanied,  and  usually  is,  by  a  reduction  in 
the  expense,  it  does  not  follow  that  the  reduction 
would  be  a  continuous  one  for  unlimited  increases 
in  the  volume  of  business.  It  is  in  all  probability 
only  a  question  as  to  how  soon  forces  would 
begin  to  operate  to  cause  the  business  to  be  done 
at  a  greater  cost  per  unit,  and  it  is  probable  that  a 

[53] 


INSURANCE  AND  THE  STATE 


OJ  O  Q 
O  (N  OS 


iiii 

i§§i 


O 
O5 


O5  O5  O  O 


~ « ^ 

g  §  fc 


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al 


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t-»  oo  os  o 

gO    O    '-H 
OS  OS  OS 


[54] 


STATE  LIFE  INSURANCE 

state  would  be  no  more  exempt  from  the  final 
operation  of  such  forces  than  is  a  private  company. 
This  limit  has  certainly  not  been  reached  by  any 
of  the  private  companies,  and  any  legislation 
restricting  the  amount  of  new  business  which  a 
company  can  write  must  be  justified  on  grounds 
other  than  that  it  means  an  increase  in  unit 
expense  for  the  business. 

As  regards  such  savings  in  operating  expense  as 
salaries  of  directing  officials  and  other  heads  of 
executive  departments,  there  would  be  consider- 
able opportunity  for  economy.  These  administra- 
tive positions  call  for  very  high-grade  ability,  but 
doubtless  one  medical  examiner  or  one  president 
could  direct  with  efficient  subordinates  the  work  of 
the  insurance  of  the  state  which  is  now  done  by  the 
same  officials  of  the  several  companies  within  the 
state.  But  this  again  assumes  that  these  executive 
officials  of  private  companies  are  overpaid ;  that 
is,  that  they  receive  a  certain  salary  for  work  which 
does  not  occupy  their  full  working  hours,  and  that 
they  could  be  more  completely  occupied  in  their 
field  of  work. 

We  need  not,  at  this  point,  discuss  the  ques- 
tion whether  the  state  could  or  would  secure 
and  retain  men  of  as  high-grade  ability  to  con- 

[55] 


INSURANCE  AND  THE  STATE 

duct  the  business  as  are  now  employed  by  the 
companies. 

The  savings  from  rent  for  most  states  would  not 
be  great,  since  the  insurance  now  in  force  in  many 
states  has  been  sold  by  companies  whose  home 
offices  are  in  other  states.  It  is  true  that  some  of 
these  foreign  companies  maintain  branch  offices, 
and  so  far  as  this  is  true  the  possible  saving  from 
this  source  would  be  augmented.  Those  states 
which  have  old  companies  with  a  large  volume  of 
business  would  be  able  to  effect  the  greatest 
savings  from  rent. 

It  is  sometimes  argued  for  a  system  of  state 
insurance  that  the  policyholder  would  know 
definitely  what  the  costs  were,  and  he  would  not 
be  at  the  mercy  of  the  companies  as  he  now  is. 
It  is  said  that  the  prospective  purchaser  cannot 
distinguish  one  company  from  another  as  to  costs, 
and  that  after  he  becomes  a  policyholder  he  has 
no  choice  but  to  continue  as  a  member,  however 
unsatisfactory  the  returns  or  costs  are  to  him  in 
his  company  as  compared  with  those  in  another 
company.  There  is  a  large  element  of  truth  in  the 
statement.  He  certainly  has  no  choice  about 
continuing  a  member,  unless  he  chooses  to  lose 
his  policy  by  lapsing.  Yet  it  must  be  remembered 

[56] 


STATE  LIFE  INSURANCE 

that  a  company  is  not  absolutely  free  to  increase 
costs.  A  company  does  not  begin  nor  at  any  one 
time  has  it  a  complete  membership.  Continued 
additions  must  be  made  to  secure  average  results 
in  mortality  and  interest  earnings.  There  is,  there- 
fore, the  necessity  all  the  time  to  make  a  good 
showing,  for  there  is  no  greater  inducement  for 
prospective  buyers  than  low  initial  costs.  Doubt- 
less many  buyers  cannot  make  an  intelligent 
comparison  of  companies,  but  the  prevailing  con- 
ditions of  competition  among  the  companies  pre- 
vent unusually  high  costs  on  the  part  of  any  one 
company,  and  the  supervision  by  the  state  guaran- 
tees adequate  costs  on  the  part  of  all.  Yet  it 
must  be  admitted  that  competition  is  not  so  per- 
fect as  to  secure  full  protection  to  the  policyholder. 
For  this  result  to  be  secured,  the  buyer  would 
need  to  have  sufficient  knowledge  to  bargain  with 
the  seller,  and  this  is  not  the  case  with  the  buyer  of 
insurance.  Particular  policies  are  now  sold  which 
the  purchaser  would  never  buy  if  he  knew  more 
about  insurance.  Can  it  be  assumed  that  under 
the  state  each  kind  of  policy  will  be  sold  at  its 
lowest  possible  cost,  and  will  have  incorporated  in 
the  contract  every  possible  privilege  for  the  buyer  ? 
Under  a  state  monopoly  this  comparison  could  not 

[57] 


INSURANCE  AND  THE  STATE 

be  made.  Whether  private  insurance  costs  are  too 
high  and  whether  state  insurance  costs  would  be 
lower  is  the  point  at  issue.  However  belated 
some  of  the  reforms  in  insurance  have  been,  it 
must  be  admitted  that  many  of  the  so-called  bene- 
fit privileges  in  the  policy  have  resulted  from  this 
competition  among  companies.  This  is  not  to 
argue  that  insurance,  as  now  administered,  is  per- 
fect. Many  reforms  are  awaiting  accomplish- 
ment. Greater  efficiency  in  many  phases  of  the 
business  can  be  accomplished.  Whether  these 
reforms  and  this  greater  efficiency  would  be  accom- 
plished more  rapidly  under  state  insurance  is  a 
question  upon  which  there  is  difference  of  opinion. 
The  officials  of  private  insurance  who  are  interest- 
ing themselves  in  a  campaign  of  public  education 
on  insurance  should  realize  what  this  campaign 
if  it  is  successful  will  mean.  Demands  will  be 
made  after  the  public  is  informed  upon  insurance, 
which  will  not  be  easy  to  meet. 

They  will  demand  greater  efficiency  and  lower 
costs  than  now  prevail.  They  will  demand  a  better 
enforcement  of  the  trustee  relationship  of  the  offi- 
cials, and  an  extension  of  the  insurance  principle. 

This  concludes  the  consideration  of  the  subject 
of  increasing  the  number  of  insured  by  reducing 

[58] 


STATE  LIFE  INSURANCE 


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[59 


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INSURANCE  AND  THE  STATE 


the  cost.  There  remains  the  possibility  of  increas- 
ing the  number  of  the  insured  by  increasing  under 
state  insurance  the  knowledge  of  insurance.  This 
would  justify  its  assumption  by  the  state  for 
social-developmental  purposes.  In  this  connec- 
tion it  may  be  inquired  to  what  extent  has  private 
insurance  met  its  opportunity. 

Table  IV  shows  increase  of  insurance  by  decades. 

As  a  partial  but  not  a  conclusive  test  of  private 
insurance  embracing  its  opportunity,  a  compari- 
son of  the  above  total  of  ordinary  and  industrial 
insurance  may  be  made  with  the  growth  of  popula- 
tion and  the  increase  in  national  wealth.  This 
comparison  is  shown  in  table  V. 

If  we  consider  percentages  alone  and  include  the 
percentage  increase  in  policies  as  well  as  amounts 
of  insurance,  the  following  results  are  shown : — 

TABLE  VI 


YEAB 

PERCENTAGE 
INCREASE  IN 
POPULATION 

PERCENTAGE 
INCREASE  IN 
WEALTH 

PERCENTAGE 
INCREASE  IN 
AMOUNT  OF 
INSURANCE 

PERCENTAGE 
INCREASE  IN 
NUMBER  OF 
POLICIES 

1880 

30.2 

45.1 



20 

1890 

25.5 

26.1 

153 

467 

1900 

21.2 

20.7 

111 

175 

1910 

21.1 

20.9 

91 

105 

[60] 


STATE  LIFE  INSURANCE 

Statistics  either  as  to  the  number  of  people 
insurable  or  as  to  the  number  of  different  persons 
insured  are  not  available,  and  only  rough  estimates 
can  be  made.  In  1910  there  were  in  force 
38,546,675  ordinary  life  policies,  industrial  policies, 
and  fraternal  certificates.  How  many  persons 
does  this  number  represent  ?  Estimates  from 
insurance  officials  differ  somewhat.  In  one  of  the 
oldest  and  largest  ordinary  life  companies  the 
percentage  between  the  number  of  policies  and 
different  policy  holders  is  71  per  cent.  In  one  of 
the  promising  new  companies  which  has  been  in 
business  six  years  the  same  percentage  is  97  per 
cent.  However,  it  must  be  remembered  that  while 
a  person  may  have  only  one  policy  in  a  particular 
company,  yet  he  may  have  policies  in  other  com- 
panies, and  this  would  result  in  duplication.  Pos- 
sibly one  might  venture  the  estimate  that  the 
7,000,000  policies  of  ordinary  life  insurance  are 
held  by  about  3,000,000  persons,  and  that  the 
total  38,000,000  policies  of  all  kinds  are  held  by 
about  20,000,000  of  people.  These  are,  however, 
but  estimates  in  lieu  of  any  definite  statistics. 
However,  in  order  to  test  the  extent  to  which  pri- 
vate insurance  has  met  its  opportunity,  we  should 
know  the  number  of  people  insurable,  and  in  this 

[61] 


INSURANCE  AND  THE  STATE 

connection  estimates  are  more  unreliable.  A  large 
percentage  of  the  people  are  insurable  in  industrial 
insurance,  but  a  smaller  percentage  in  fraternal  and 
a  still  smaller  number  in  ordinary  life  companies. 
We  may  use  the  percentage  of  the  1900  census 
and  find  that  the  number  of  males  between  21  and 
60  years  of  age  is  22,793,946.  But  women  are 
being  solicited  for  insurance,  and  children,  as 
well  as  those  over  60,  are  insurable  under  the  indus- 
trial plan.  Then,  too,  by  the  advances  in  knowl- 
edge, both  as  to  health  and  from  insurance  experi- 
ence, many  previously  uninsurable  are  brought 
in  the  class  of  insurable.  However  far  private 
insurance  has  failed  to  insure  the  insurable,  the 
results  which  have  been  achieved,  as  shown  in 
Tables  I  and  II,  acquit  the  administrators  of 
private  insurance  of  any  charge  of  slothfulness  in 
increasing  their  business. 

It  is  urged  that  state  insurance  would  educate 
the  people  on  the  subject  of  insurance.  It  is 
probably  true  that  the  novelty  of  the  plan  would 
attract  some  attention  at  first,  but  it  is  very  ques- 
tionable if  any  permanent  or  widespread  educa- 
tion would  result  from  the  mere  fact  of  state  insur- 
ance. If  the  state  should  enter  upon  a  campaign 
of  public  education,  this  would  entail  costs  which 

[62] 


STATE  LIFE  INSURANCE 

would  need  to  be  met  either  from  the  insurance 
collections  or  from  some  source  of  state  revenue. 
The  greatest  single  force  to-day  for  educating  the 
people  on  insurance  is  the  75,000  insurance  agents, 
and  if  the  state  is  to  transact  the  business  without 
agents,  the  campaign  of  education  would  need  to 
be  planned  along  very  broad  lines,  and  hence  the 
cost  would  be  proportionally  high. 

Another  phase  of  the  educational  work  of  state 
insurance  has  been  suggested  in  the  effect  it  would 
have  in  stimulating  interest  in  honest  and  efficient 
government.  Something  may  be  accomplished 
in  this  respect ;  but  should  a  policyholder  feel  any 
more  interest  in  the  honesty  and  efficiency  of  the 
state  official  who  collected  and  invested  his  pre- 
mium than  a  taxpayer  should  feel  interest  in  the 
honesty  and  efficiency  of  the  state  official  who 
assessed,  collected,  and  spent  his  tax  ? 

A  minor  reason  assigned  for  state  insurance,  as 
a  means  of  increasing  the  popularity  of  insurance, 
is  that  the  people  would  have  great  confidence  in 
its  security.  Yet  it  is  safe  to  say  that  one  of  the 
least  serious  objections  to  overcome  in  selling 
insurance  is  the  one  that  the  companies  are  not 
sound.  The  investigations  of  1905  and  those 
made  since  proved  beyond  doubt  that  the  financial 

[63] 


INSURANCE  AND  THE  STATE 

security  of  the  companies  is  beyond  question,  and 
few  prospective  buyers  of  insurance  offer  this  as  a 
vital  objection  to  the  purchase  of  insurance. 

Again,  it  is  urged  that  under  the  state,  insurance 
would  be  applied  to  risks  not  now  insured  by  the 
ordinary  private  company.  It  is  pointed  out  that 
insurance  companies  do  not  solicit  insurance  from 
those  whose  ability  to  pay  premiums  is  doubtful, 
although  they  may  be  excellent  physical  risks  and 
might  greatly  benefit  from  the  use  of  the  insur- 
ance principle. 

It  is  well  known  that  the  insurance  companies 
endeavor  to  keep  their  lapse  rate  low.  Then,  too, 
but  few  companies  will  insure  other  than  standard 
lives;  that  is,  those  of  normal  physical  vigor. 
Could  the  state  afford  to  insure  those  of  good 
physical  vigor  but  of  limited  financial  means  ? 
Certainly  the  mere  fact  of  being  insured  under  the 
state  cannot  affect  their  financial  ability.  That 
weakness  is  fundamentally  due  to  other  causes. 
So  far  as  lapses  are  avoided,  simply  because  they 
are  used  as  arguments  against  the  company  in 
selling  its  policies  in  competition  with  other  com- 
panies, so  far  they  could  occur  under  state  insur- 
ance. But  so  far  as  lapses  unfavorable  affect  the 
cost  of  insurance,  so  far  the  state  could  not  afford 

[641 


STATE  LIFE  INSURANCE 

to  have  them  any  more  than  a  private  company 
can.  Could  substandard  lives  be  insured  under 
state  insurance  ?  This  question  must  be  answered 
by  deciding  whether  the  state  would  be  more  active 
in  collecting  data  and  drawing  up  tables  under 
which  such  lives  could  be  insured.  It  is  quite 
possible  that  an  active  and  capable  department 
of  insurance  would  make  a  much  wider  applica- 
tion of  the  insurance  principle  than  is  now  found 
under  private  insurance. 

State  insurance  may  be  urged  neither  for  the 
purpose  of  deriving  revenue  nor  for  distinctively 
social  purpose,  but  as  the  only  satisfactory  method 
of  regulating  a  private  business.  The  necessity 
for  such  a  regulation  must  arise  because  of  one  or 
more  of  the  following  reasons :  - 

(a)  Because  it  is  or  threatens  to  become  a 
monopoly,  characterized  by  the  exercise  of  op- 
pressive power ; 

(6)  Because  there  is  unregulated  and  injurious 
competition ; 

(c)  Because   the   private   companies   represent 
unduly  large  concentrations  of  wealth ; 

(d)  Because  the  policyholders  cannot  be  assured 
protection  by  the  present  system  of  regulation. 

It  is  sometimes  said  that  insurance  tends  to 
[65] 


INSURANCE  AND  THE  STATE 

become  a  monopoly,  and  the  proof  of  the  statement 
is  given  that  only  a  few  large  companies  exist  in 
the  several  countries,  and  that  these  companies 
make  agreements  to  impose  certain  conditions 
upon  policyholders.  In  the  United  States  there 
are  238  life  insurance  companies  listed  in  the 
Year  Book  for  1911.  During  the  past  decade 
many  new  companies  have  been  formed.  Nor  is 
it  true  that  the  companies  are  either  all  large  or 
small.  Six  companies  wrote  new  business  during 
the  year  amounting  to  over  $100,000,000  each; 
four  from  $50,000,000  to  $100,000,000;  seven 
from  $25,000,000  to  $50,000,000;  twelve  from 
$15,000,000  to  $25,000,000;  eleven  from 
$10,000,000  to  $15,000,000;  twenty-seven  from 
$5,000,000  to  $10,000,000;  fifty  from  $1,000,000 
to  $5,000,000 ;  and  twenty-four  under  $1,000,000. 
Additional  evidence  offered  as  a  proof  of  a 
monopoly  is  that  the  price  charged  for  the  service 
is  largely  uniform  in  all  companies.  This,  it  is 
urged,  proves  agreements  among  the  companies. 
This  evidence  cannot  be  admitted  for  the  reason 
that  insurance  costs,  at  least  primary  costs,  are 
determined  for  the  companies  by  the  mortality 
and  interest  rate,  and  for  the  well-known  fact  that 
in  the  United  States  at  least  there  has  been  an 

[66] 


STATE  LIFE  INSURANCE 

unfortunate  lack  of  agreement  among  the  com- 
panies. It  has  been  difficult  to  secure  some  co- 
operation from  the  companies  from  which  the 
public  might  receive  great  gain.  Insurance  in  the 
United  States  has  not  been  injured  by  agree- 
ments, but  from  the  lack  of  them. 

Is  there  unregulated  or  injurious  competition  ? 
It  must  be  admitted  that  notwithstanding  the 
great  improvement  in  state  legislation,  enacted 
for  this  purpose  especially  since  1905,  full  regula- 
tion in  this  respect  has  not  been  realized.  It  is 
true  that  the  security  of  the  funds  of  the  policy- 
holders,  at  least  the  funds  to  mature  their  con- 
tracts, is  well  assured  by  the  state  laws  regarding 
the  methods  of  the  valuation  of  policies  and  the 
investments  of  the  funds  of  the  companies.  But 
it  is  also  true  that  new  companies  are  permitted 
to  sell  their  stocks  upon  almost  any  terms  in 
many  of  the  states.  Companies  are  permitted  in 
some  states  to  spend  recklessly  policyholders* 
money  in  building  expensive  home  offices  or  in 
other  questionable  methods  of  advertising.  It  is 
suspicioned  that  some  companies  are  permitted 
to  "juggle"  their  funds  in  the  distribution  of 
dividends,  with  the  result  that  classes  of  policy- 
holders  suffer  unnecessarily  in  equitable  returns. 

[67] 


INSURANCE  AND  THE  STATE 

As  to  the  third  argument,  that  private  companies 
represent  unduly  large  concentration  of  wealth. 
The  large  size  of  a  few  companies  has  not  been 
accomplished  by  amalgamation,  as  is  true  with 
many  other  examples  of  "big  business"  in  the 
United  States,  but  by  the  development  of  a  single 
unit.  Therefore  there  has  not  been  for  this  par- 
ticular reason  a  restriction  of  competition.  If, 
however,  the  increase  in  age  of  the  company  does 
not  mean  an  increase  in  the  cost  of  insurance, 
but  a  decrease  in  cost,  or  at  least  a  cost  as  low  as 
other  competing  companies,  is  there  any  good 
reason  to  restrict  by  law  the  size  of  companies  ? 
We  are  prone  in  these  latter  days  to  condemn  any 
financial  organization  that  is  large,  because  great 
evil  has  been  found  in  connection  with  some  of  the 
large  financial  concerns.  It  is,  however,  probably 
true  that  the  top  of  the  curve  of  increased  size 
in  the  large  companies  has  been  reached,  for  the 
margin  of  insurance  added  each  year  over  insur- 
ance lost  is  growing  smaller.  But  a  final  answer 
to  the  objection  is  that  the  states  can,  as  New 
York  now  does,  restrict  the  growth  of  a  company 
by  limiting  the  amount  of  new  business  which  it 
may  write  each  year. 

Another  reason  sometimes  urged  for  the  com- 
[68] 


STATE  LIFE  INSURANCE 

plete  regulation  of  insurance  by  means  of  state 
insurance  is  that  more  liberal  provisions  in  policies 
would  be  granted.  However  late  some  of  the 
rights  have  been  granted  to  policyholders,  there 
is  in  the  states  of  most  advanced  regulation  little 
cause  of  complaint  at  present  on  account  of  the 
absence  of  privileges  in  the  policies.  The  states 
have  complete  power  to  enforce  desirable  liberal 
provisions,  and  if  they  do  not  now  choose  to  do  so, 
it  is  difficult  to  understand  why  they  would  do 
this  if  the  states  were  selling  the  policies.  Such 
an  argument  arises  from  the  memory  or  knowl- 
edge of  those  times  when  the  insurance  contract 
was  drawn  up  with  little  consideration  to  the 
policyholder.  Insurance  managers  have  a  new 
conception  of  their  duty  to  the  public,  whether  this 
conception  has  arisen  from  the  compulsory  act 
of  the  state  or  has  resulted  from  a  new  vision  of 
the  business. 

Such  a  minor  argument,  that  by  state  insurance 
much  money  would  be  kept  in  the  state,  deserves 
no  critical  consideration,  were  it  not  for  the  fact 
that  it  is  seriously  offered  by  those  in  responsible 
positions.  It  is  a  modern  form  of  that  old  argu- 
ment originated  by  the  medieval  mind  and  still 
kept  alive  by  those  of  modern  times  who  afford  us 

[69] 


INSURANCE  AND  THE  STATE 

an  example  of  how  this  medieval  mind  worked. 
Capital  is  mobile  and  is  not  governed  in  its  move- 
ment by  sentiments  of  the  hearth  and  home. 
Capital  will  remain  in  the  state  if  it  can  receive  as 
good  return  as  it  can  abroad.  If  it  cannot,  is  there 
not  every  reason  why  policyholders'  money  should 
leave  the  state  ?  for  the  state  must  certainly  be 
interested  in  supplying  the  insurance  —  a  social 
benefit  —  under  the  lowest  possible  cost,  if  the 
state  transacts  the  business. 

Some  will  oppose  state  insurance,  for  fear  that 
it  cannot  be  kept  free  from  the  politicians,  and  not 
because  they  do  not  believe  the  state  should  not  or 
could  not  do  this  work.  It  is  said  that  our  govern- 
ment is  a  government  of  parties,  and  that  the 
prime  object  of  a  political  party  is  to  secure  con- 
trol of  offices.  The  evil  effects,  it  is  supposed, 
might  result  from  two  sources.  First,  by  a  politi- 
cal party  in  power  selecting  inefficient  administra- 
tors of  the  state  insurance.  Second,  by  bidding 
for  votes  by  promising  reduction  in  costs  of  the 
insurance  or  by  the  extension  of  benefits  which 
would  impair  the  security  of  the  contracts,  however 
efficiently  the  business  might  be  managed.  Under 
our  changing  party  officials  it  is  frequently  difficult 
to  realize  a  high  grade  of  efficiency .  Of  the  45 

[70] 


STATE  LIFE  INSURANCE 

superintendents  of  insurance  in  1902  only  4  were 
in  office  eight  years  later.  If  this  should  occur 
under  a  system  of  state  insurance,  it  would  doubt- 
less mar  the  efficiency  of  the  service,  if  it  did  not, 
as  it  probably  would  not,  prevent  the  carrying  on 
of  the  work.  Yet  it  is  urged  that  civil  service  is 
an  answer  to  the  above  objection.  But  civil 
service  is  not  synonymous  with  efficiency.  Much 
depends  upon  the  type  of  men  who  direct  the  civil 
service  and  the  law  itself.  For  many  kinds  of 
ability  civil  service  systems  have  devised  no  satis- 
factory test.  Especially  would  this  be  true  in 
attempting  to  test  an  individual's  fitness  to  con- 
duct a  system  of  state  insurance.  Civil  service 
has  not  yet  solved  the  question  of  what  shall 
be  done  with  the  inefficient  individual  who  has 
secured  his  position  by  meeting  its  tests.  The 
state  has  not  yet  succeeded,  in  the  United  States 
at  least,  in  securing  and  keeping  the  highest  grade 
of  ability.  The  rewards  in  private  business  are 
often  so  much  greater,  especially  in  financial  lines 
of  business  and  managerial  positions,  —  the  im- 
portant lines  in  a  system  of  state  insurance,  —  that 
some  provisions  would  need  to  be  made  to  meet 
this  demand  of  private  business. 

Lamentable  as  it  may  seem  to  some  persons, 
[711 


INSURANCE  AND  THE  STATE 

the  satisfaction  which  comes  from  doing  a  public 
service  efficiently  and  in  doing  it  for  that  indefinite, 
intangible,  public  good,  and  the  inspiration  which 
comes  from  being  a  faithful  servant  of  the  people, 
are  not  as  strong  motives  to  conduct  as  those  which 
come  from  the  prospect  of  receiving  a  full  mone- 
tary reward  for  efficiency,  and  from  the  pleasure 
received  from  winning  victories  in  the  competi- 
tive game  of  business.  We  have  many  faithful 
and  honest  men  in  public  life,  but  too  few  efficient 
ones.  It  must  be  recognized,  however,  that  there 
has  been  a  very  great  improvement  in  public 
service,  and  that  probably  even  greater  improve- 
ment is  promised.  It  is  becoming  the  rule  to 
select  officials  for  public  service  because  of  their 
specific  training  for  a  work,  and  not  merely  by 
examination.  Finally,  it  may  be  pointed  out  in 
regard  to  civil  service,  that  it  is  not  chiefly  in 
completely  testing  fitness  for  office  which  promises 
so  much  good  for  the  public,  but  rather  in  prevent- 
ing the  removal  without  cause  of  a  public  official 
whose  efficiency  has  been  proven  by  services 
rendered. 

A  minor  argument  offered  against  state  insur- 
ance is  that  there  would  be  an  unfavorable  selec- 
tion of  risks.  If  there  should  be  no  agents,  it  is 

[72] 


STATE  LIFE  INSURANCE 

said  that  only  those  who  were  much  concerned 
about  securing  insurance  would  go  to  the  trouble 
of  seeking  it,  while  other  better  risks  would  wait 
to  be  solicited  by  the  agents  of  the  private  com- 
panies. This  assumes  that  there  would  not  be  a 
state  monopoly  of  insurance.  Again  it  is  urged,  if 
there  were  agents  who  were  paid  less  than  agents 
are  now  paid,  that  they  would  be  induced  to  solicit 
applications  somewhat  indiscriminately,  in  order 
to  secure  the  many  small  commissions.  The  agent 
of  the  private  company  realizes  that  his  position 
depends  upon  having  a  large  percentage  of  his 
risks  accepted  by  the  company.  It  is  also  urged 
that,  if  there  were  no  agents  as  such,  those 
state  officials  empowered  to  transmit  applications 
would  be  willing  to  render  the  service  for  any  one, 
and  that  medical  examiners  might  be  less  careful 
than  they  now  are,  in  that  the  benefits  to  an  indi- 
vidual and  often  a  friend  would  be  balanced  over 
against  the  duty  to  the  state.  These,  however,  are 
gratuitous  assumptions  which  can  be  verified  or 
disproved  only  after  a  longer  mortality  experience 
of  state-insured  risks  is  available. 

It  has  been  shown  that  only  in  one  case  is  a 
monopoly  of  state  insurance  provided.  This 
seems  very  desirable,  especially  as  a  plan  of  pro- 

[731 


INSURANCE  AND  THE  STATE 

cedure  for  the  states  of  the  United  States.  This 
would  give  opportunity  for  organizing  the  work 
and  making  the  necessary  adjustments  in  our 
system  of  administrating  the  business  of  the  state 
and  preparing  the  public  for  state  insurance. 
It  is  not  probable,  however,  that  even  a  state 
monopoly  would  prevent  fraternal  or  purely 
mutual  insurance,  for  the  state  is  to  assume  it 
chiefly  for  the  social  benefits,  and  if  the  public 
is  voluntarily  doing  what  the  state  proposes  to  urge 
them  to  do,  there  would  be  no  reason  to  prevent 
purely  mutual  insurance. 

There  remains  for  consideration  but  the  final 
question  of  indemnity  to  private  companies,  for 
it  is  scarcely  to  be  doubted  that  the  logical  result 
of  state  life  insurance  will  be  the  state  monop- 
oly of  life  insurance.  This  monopoly  might  be 
brought  about  for  two  reasons. 

First,  because  the  state  had  initiated  state 
insurance  and  felt  that  it  had  properly  organized 
the  work,  and  yet  sufficient  risks  were  not  being 
secured. 

Second,  because  it  became  immediately  suc- 
cessful, and  the  social  results  were  so  evidently 
good,  that  a  complete  monopoly  would  seem 
quite  justifiable. 

[74] 


STATE  LIFE  INSURANCE 

In  such  an  event  must  an  indemnity  be  granted 
to  the  private  companies  ?  Before  inquiring  if  any 
provisions  of  the  federal  or  state  constitutions 
would  be  a  bar  to  such  a  monopoly  without  in- 
demnity, let  us  consider  it  from  the  broader  aspect 
of  the  relation  of  a  state  to  its  citizens  and  their 
property. 

In  early  times  it  was  the  fashion  to  justify  acts 
of  the  state  under  the  formula  that  the  "state 
is  sovereign  and  therefore  irresponsible,"  but  in 
the  later  days  of  constitutions  we  are  wont  to 
justify  acts  of  the  state  by  other  than  an  appeal 
to  the  vague  pretext  of  sovereignty.  The  ques- 
tion is  complicated  by  the  fact  that  rights  of  for- 
eigners would  be  affected  by  a  state  monopoly  of  in- 
surance, since  in  many  states  companies  of  foreign 
nations  have  policies  on  the  lives  of  citizens  of  the 
state.  Under  international  law  the  sovereignty 
of  the  state  is  not  positively  admitted,  and  a  state 
is  responsible  for  all  violations  of  the  rules  of  inter- 
national law,  notwithstanding  the  fact  that  the 
act  of  injury  results  from  a  positive  national  or 
state  law.  It  cannot  evade  responsibility  by 
appealing  to  the  sovereignty  which  authorized  the 
legislative  act.  But  does  it  follow  from  this  that 
a  state  would  be  responsible  for  any  financial  loss 

[751 


INSURANCE  AND  THE  STATE 

suffered  by  a  foreign  insurance  company,  if  the 
insurance  business  was  made  a  monopoly  by  the 
state  ?  A  recent  writer  has  said  on  this  point  that 
"it  is  necessary  to  lay  stress  on  the  judicial  nature 
of  the  act  creating  the  insurance  monopoly.  The 
act  which  creates  the  monopoly  is  a  law  in  the  full 
meaning  of  the  word.  .  Law  is  a  general  and  imper- 
sonal rule,  and  the  essential  element  in  a  legislative 
act  is  the  prescribing  of  a  course  of  social  conduct 
which  must  be  observed  by  persons  in  general. 
The  organization  of  a  public  monopoly  of  insur- 
ance is  essentially  for  the  purpose  of  regulating  the 
activity  of  individuals  in  a  certain  field."  It 
applies  to  all,  but  only  to  a  special  field,  just  as  a 
regulation  of  commerce,  industry,  or  a  profession. 
It  is  but  prescribing  by  the  legislature  that  the 
activity  of  individuals  shall  be  exercised  only  in  a 
certain  manner  and  shall  conform  to  a  certain  idea 
of  social  justice  and  public  utility.  But  it  is  said 
that  the  extent  of  legislative  power  will  be  deter- 
mined by  the  character  of  the  thing  forbidden  to 
an  individual.  The  doing  of  certain  acts  carries 
with  it  a  generally  admitted  public  injury.  Such 
acts  as  prohibiting  the  importation  of  immoral 
books,  the  manufacture  and  sale  of  harmful  drugs, 
are  too  well  established  to  need  a  discussion  of 

[76] 


STATE  LIFE  INSURANCE 

their  justification.  All  such  laws  depend  upon 
the  ideals  of  justice  prevailing  at  a  given  time 
in  a  country  which  requires  the  state  to  protect 
the  physical  and  moral  welfare  of  its  citizens. 

But  a  distinction  is  to  be  made  in  regard  to  a 
state  monopoly  of  insurance.  In  such  a  case,  not 
only  is  the  individual  to  be  denied  the  right  to 
engage  in  the  business,  but  he  is  to  be  forced  to  give 
up  his  property  rights  in  the  business,  and  the 
state  is  then  to  do  what  it  prohibits  the  individual 
from  doing.  It  may  be  urged  that  every  legisla- 
tive reform  is  a  gain  for  some  and  a  loss  for  others ; 
that  progress  would  be  impossible  if,  at  each  stage 
of  its  forward  march,  it  were  necessary  to  pay 
toll  to  the  privileged  ones  who  were  profiting  by 
the  preceding  circumstances.  But  does  the  state 
enrich  itself  ?  It  has  no  wealth  other  than  that 
of  its  citizens.  The  state  assumes  the  monopoly 
for  the  social  benefits  resulting,  and  not  as  a  source 
of  revenue.  A  damage  which  can  secure  an  indem- 
nity must  secure  it  from  the  fact  that  the  damage 
was  a  special  one.  For  the  welfare  of  the  com- 
munity the  monopoly  of  insurance  is  assumed.  A 
damage  is  caused  to  those  who  were  in  that  busi- 
ness, but  it  is  a  loss  borne  for  the  common  interest, 
and  no  particular  individual  benefits  from  the 

[77] 


INSURANCE  AND  THE  STATE 

damage  inflicted.  The  damage  done  by  a  law  of 
this  character  is  never  a  special  damage  because 
the  general  impersonal  character  of  the  law  itself 
is  contrary  to  it.  It  cannot  be  said  that  those 
engaged  in  the  business  at  the  time  of  the  enforc- 
ing of  a  state  monopoly  of  insurance  would  alone 
suffer  a  loss.  Every  one  who  intended  to  engage  in 
the  forbidden  industry  might  be  said  to  suffer  a 
loss,  and  an  acceptable  doctrine  of  special  damages 
might  be  held  to  include  this  class.  Nor  can  it  be 
held  that  the  damage  arises  from  any  damage  to 
tangible  property,  since  an  insurance  company 
has  but  little  of  real  property.  It  is  the  taking 
away  of  an  employment  and  the  prospective 
income  which  results  from  labor.  It  must  be 
granted,  however,  that,  waiving  any  general  ques- 
tion of  the  rights  of  the  individual  and  the  duties 
of  the  state,  there  are  specific  provisions  in  our 
federal  and  in  our  state  institutions  which  affect 
the  monopolization  of  insurance  by  the  state. 
The  fifth  and  fourteenth  amendments  forbid 
the  depriving  of  any  person  of  property  without 
due  process  of  law.  The  fifth  amendment  states 
further  that  private  property  cannot  be  taken  for 
public  use  without  just  compensation,  and  the 
fourteenth  amendment  forbids  any  state  to  deny 

[78] 


STATE  LIFE  INSURANCE 

to  any  person  within  its  jurisdiction  the  equal 
protection  of  the  laws.  Again,  the  federal  Con- 
stitution forbids  the  impairment  of  the  obligation 
of  contracts,  and  provides  that  citizens  of  each 
state  shall  be  entitled  to  all  the  privileges  and  im- 
munities of  citizens  in  the  several  states.  What 
troublesome  questions  might  arise  under  these  pro- 
visions or  other  provisions  of  the  federal  Consti- 
tution in  the  event  that  a  state  should  endeavor 
to  monopolize  insurance  cannot  be  predicted. 

The  insurance  policies  are  contracts  made  be- 
tween the  company  and  the  citizens  of  the  several 
states.  They  are  contracts  extending  over  long 
periods,  and  by  their  number  and  character  estab- 
lish a  certain  species  of  income  yielding  property 
for  the  officials  of  the  company,  at  least  in  the  case 
of  stock  insurance  companies.  What  other  ques- 
tions would  arise  from  the  provisions  of  the 
respective  state  constitutions  only  an  examination 
of  state  constitutions  would  disclose.  However, 
all  these  difficulties  need  not  probably  prevent  the 
state  from  monopolizing  the  insurance  business. 
For  the  reason  that  insurance  companies  existing 
at  the  time  of  monopolization  would  suffer  a 
pecuniary  damage,  and  for  the  fact  that  these  con- 
stitutions do  present  difficulties,  the  better  way 

[79] 


INSURANCE  AND  THE  STATE 

would  probably  be  to  grant  the  companies  the 
right  to  maintain  their  existing  insurance,  but  to 
prevent  them,  after  a  certain  period,  from  writing 
new  policies.  This  would  give  the  state  an  oppor- 
tunity to  organize  its  work  and  the  companies  an 
opportunity  to  adjust  their  business. 


[80] 


II 

FIRE  INSURANCE 


CHAPTER  IV 
THE  NATURE  OF  FIRE  INSURANCE 

IT  is  necessary  to  inquire  into  the  nature  of 
fire  insurance,  and  especially  to  make  a  com- 
parison of  it  with  life  insurance  before  the  discus- 
sion can  proceed  to  the  next  topic  of  investigation, 
viz.  is  the  business  of  fire  insurance  one  suited  to 
transaction  by  the  state  ? 

Many  mistakes  in  the  regulation  of  insurance 
have  been  made  by  assuming  a  similarity  in  the 
character  of  the  various  kinds  of  insurance  when 
no  such  resemblance  exists. 

The  fire  insurance  contract  is  a  personal  con- 
tract of 'indemnity.  Its  personal  character  is  not 
peculiar  to  it  as  a  contract,  since  most  insurance 
contracts  are  of  this  description,  but  the  personal 
factor  is  to  be  emphasized  somewhat  more  fully 
in  the  fire  insurance  contract,  since  the  one  party 
to  the  contract  —  the  insurer  —  is,  under  the 
present  methods  of  conducting  the  business,  very 
dependent  upon  the  utmost  good  faith  being  shown 

[83] 


INSURANCE  AND  THE  STATE 

by  the  other  party  —  the  insured.  In  life  insur- 
ance the  medical  examination  can  be  made  search- 
ing and  almost  all  undesirable  risks  be  excluded, 
and  therefore  the  chances  of  immediate  and  heavy 
losses  be  avoided.  But  in  fire  insurance  the  most 
rigid  inspection  of  a  building  can  only  tell  the 
company  what  its  probable  construction  and 
exposure  hazards  are,  leaving  yet  largely  unknown 
the  important  hazard  of  continued  occupancy  and 
the  moral  hazard.  Daily  inspection  cannot  be 
made  by  the  company  to  discover  the  manner  in 
which  the  insured  uses  his  building,  his  careful- 
ness, and  his  honesty  in  making  the  contract. 

The  fire  insurance  contract  is  also  one  of  in- 
demnity ;  that  is  to  state,  it  is  one  by  which  the 
owner  should  receive  a  sum  equal  to  or  at  least 
not  in  excess  of  the  value  of  the  property  destroyed. 
It  may  indeed  be  less,  because  the  insured  has 
chosen  to  purchase  only  partial  indemnity,  but  it 
can  never,  except  in  case  of  personal  dishonesty 
or  ignorantly  enacted  state  laws,  be  more  than  the 
value  of  the  property  destroyed.  In  life  insurance 
no  such  indemnity  is  implied  in  the  contract,  for 
the  very  good  reason  that  life  is  an  immaterial 
thing  which  lends  itself  only  to  very  rude  calcula- 
tions of  its  money  value. 

[84] 


NATURE  OF  FIRE  INSURANCE 

The  value  of  real  estate,  and  especially  personal 
property,  is  continually  changing.  The  latter 
class  of  property  is  suffering  depreciation,  either 
by  use  or  the  continual  changes  in  market  condi- 
tions of  supply  and  demand.  Therefore  even  the 
value  of  the  property  expressed  in  the  contract 
at  the  time  of  writing  the  policy  should  not  be 
accepted  as  final  in  determining  the  indemnity 
when  the  loss  occurs,  notwithstanding  that  it  may 
seem  to  the  insured  that  he  purchased  so  many 
thousand  dollars  worth  of  protection  at  the  time  of 
forming  the  contract.  The  indemnity  should  be 
based  upon  the  actual  loss  suffered,  else  there  will 
be  an  inducement  offered  to  buy  insurance  for  the 
purpose  of  a  gain,  an  idea  repugnant  to  the  essen- 
tial principles  upon  which  all  insurance  is  based. 
But  no  such  question  arises  in  life  insurance. 
The  insured  purchases  the  right  for  his  beneficiary 
or  for  himself  to  receive  a  certain  stated  sum  of 
money  at  death  or  after  a  stated  interval  of  time. 
No  considerations  need  be  given  as  to  what  the 
individual's  life  is  worth.  He  cannot  possibly 
gain  from  this  contract,  at  least  in  the  sense  in 
which  gain  from  an  investment  is  used.  It  is 
true  that  fire  and  life  insurance  resemble  each 
other  in  that  the  underlying  principle  of  coopera- 

[85] 


INSURANCE  AND  THE  STATE 

tion  is  the  same.  This  is  true  in  all  kinds  of  real 
insurance.  This  is  but  to  state  that  insurance  is 
a  method  of  associating  groups  of  individuals 
exposed  to  a  risk  whereby  a  certain  degree  of  cer- 
tainty is  secured  in  place  of  total  uncertainty. 
The  groups,  by  assuming  what  was  formerly  an 
individual  burden,  reduce  this  burden  for  each. 
Indeed  in  fire  insurance  this  cooperation  of  the 
insured  group  reduces  the  burden  for  the  unin- 
sured in  that  fire  insurance,  by  requiring  or  at 
least  encouraging  better  methods  of  construction, 
better  protection  to  property,  and  more  careful 
use  of  property,  reduces  the  risk  of  those  unin- 
sured. The  mere  fact  that  the  loss  by  fire  in 
the  United  States  is  not  being  annually  reduced  is 
no  proof,  as  some  contend,  that  fire  insurance 
does  not  tend  to  reduce  the  fire  loss.  Such  a  view 
is  only  slightly  more  superficial  than  the  related 
one,  that  fire  insurance  is  a  tax.  A  tax  is  a  com- 
pulsory charge,  collected  by  the  state  upon  all 
property  with  certain  well-known  exceptions. 
But  the  fire  insurance  charge  is  not  borne  by  all 
property  holders.  It  is  not  compulsory.  Nor  is 
it  wholly  true  that  the  companies  selling  fire  in- 
surance simply  determine  the  loss  by  fire  and  pro- 
rate it  among  classes  of  property  holders.  They 

[86] 


NATURE  OF  FIRE  INSURANCE 

are  not  indifferent  as  to  losses  by  fire,  nor  can  the 
loss  be  prorated  with  the  nicety  possible  in  the 
case  of  a  tax.  Classes  of  property  show  at  differ- 
ent times  and  in  different  regions  great  variations 
in  the  loss  ratio,  and  all  classes  of  property  at  the 
time  of  a  great  conflagration  show  abnormal  losses. 
There  arises  therefore  the  question  of  relative 
risk  in  fire  and  life  insurance.  It  has  been  shown 
that  the  chief  elements  of  the  risk  in  life  insurance 
are  found  in  the  mortality  rate  and  the  invest- 
ment rate.  The  burning  rate  corresponds,  so  far 
as  there  is  any  correspondence,  to  the  mortality 
rate  in  life  insurance.  There  is,  however,  greater 
homogeneity  among  insured  lives  than  among 
insured  properties.  In  life  insurance  a  selection 
of  normal  lives  has  been  made,  and  while  these 
lives  lend  themselves  to  certain  classifications  on 
the  basis  of  sex  and  age,  and  while  experience  of 
such  insured  groups  shows  certain  marked  varia- 
tions from  the  assumed  rate  of  mortality,  yet  there 
is  this  original  selection  of  normal  lives  which 
insures  a  large  degree  of  homogeneity  in  the  group. 
Because  the  original  basis  had  a  large  degree  of 
uniformity  in  it,  a  safe  degree  of  uniformity  is 
assured  in  the  result  or  experience  on  such  lives. 
The  risk  is  not,  therefore,  from  the  standpoint  of 

[87] 


INSURANCE  AND  THE  STATE 

the  insurer,  great,  so  far  as  the  mortality  rate  is 
concerned. 

In  fire  insurance  there  are  many  kinds  of  prop- 
erty, differing  not  only  as  to  construction,  but 
also  to  the  use  to  which  it  is  put  and  the  care  with 
which  it  is  used  as  well  as  to  the  extent  of  danger 
of  its  loss  by  adjoining  properties.  Heterogeneity 
rather  than  homogeneity  is  the  characteristic. 
It  is  true  that  a  certain  selection  is  made  as  in  life 
insurance,  but  it  is  not  a  selection  which  secures 
an  equal  degree  of  uniformity.  A  frame  drug 
store  in  an  outlying  district  may  be  quite  as  good 
a  risk  as  a  brick  drug  store  in  a  congested  district. 
There  is  not,  therefore,  possible  that  selection  of 
buildings  of  the  same  class  and  description  which 
is  possible  in  life  insurance  by  the  medical  exam- 
ination. 

A  particular  class  of  buildings,  as,  for  example, 
dwelling  houses,  may  even  show  a  favorable  re- 
turn for  one  year  in  one  region  and  an  unfavorable 
result  in  another  region,  or  the  class  as  a  whole 
may  show  good  results  for  one  year  and  poor 
results  for  the  next  year,  due  to  a  heavy  loss  in 
one  place.  There  are  also  forces  in  operation 
which  tend  to  produce  decided  changes  in  com- 
paratively brief  periods  of  time.  The  use  of  new 

[88] 


NATURE  OF  FIRE  INSURANCE 

building  materials,  the  enactment  of  more  strin- 
gent building  codes,  and  the  improvement  in  fire 
protection  are  but  examples  of  the  causes  which 
very  materially  and  quickly  affect  loss  ratios  on 
different  classes  of  buildings  and  in  different 
regions. 

However  great  may  have  been  the  advances  in 
medical  science  and  the  discoveries  in  hygiene 
and  sanitation,  the  effect  on  insured  lives  will 
show  itself  slowly.  It  is  sometimes  stated  that 
fire  insurance  differs  from  life  insurance  in  that  the 
former  has  a  rate  for  each  risk,  while  the  latter 
makes  rates  for  classes  of  individual  risks  on  the 
basis  of  their  age  and  general  physical  vigor.  This 
is  true  to  a  certain  extent,  as  will  be  shown  later 
in  detail,  but  the  comparison  can  easily  be  pushed 
too  far.  Schedule  rating  with  its  specific  charges 
for  specific  features  of  the  risk  has  done  much  to 
individualize  fire  insurance  rates,  but  there  is  a 
very  definite  and  desirable  limit  to  the  individual- 
izing of  fire  rates.  What  is  needed  most  is  not 
great  individual  justice  in  rates,  but  greater  equity 
in  the  rates  upon  classes  of  property. 

But  a  more  important  aspect  in  the  question  of 
the  relative  risk  of  unexpected  loss  in  fire  and  life 
insurance  arises  in  connection  with  the  adequacy 

[89] 


INSURANCE  AND  THE  STATE 

of  rates  as  a  whole  rather  than  with  rates  on  par- 
ticular classes  of  property.  Is  there  any  danger 
that  the  collections  made  will  not  be  sufficient  to 
meet  losses  ?  Would  the  state  in  conducting  the 
business  of  fire  insurance  have  unexpected  bur- 
dens placed  upon  it  ?  Thus  arises  the  problem  of 
conflagrations.  It  is  a  well-known  fact  that  this 
country  has  experienced  these  enormously  large 
losses  by  fire  at  different  times.  They  are  a  risk 
which  it  seems  necessary  to  provide  against  at 
least  for  many  years  in  this  country.  Statistics 
show  that  there  have  been  since  1900  eighty-one 
fires  in  the  United  States  in  which  the  loss  was  over 
$1,000,000.  The  total  loss  of  property  in  these 
fires  was  $561,375,000,  or  an  annual  average  of 
$6,930,555.  This  includes  only  the  large  fires. 
The  annual  fire  loss  is,  of  course,  considerably 
greater.  In  no  year  since  1883  has  it  been  less 
than  $100,000,000,  and  during  the  past  thirty- 
seven  years,  1875-1911,  it  has  aggregated  $5,337,- 
215,795.  Owing  chiefly  to  these  conflagrations,  the 
capital  in  fire  insurance  has  been  replaced  over 
three  times  since  1871.  It  was  said  that  the  San 
Francisco  fire  destroyed  the  profits  of  fire  insur- 
ance in  the  United  States  for  the  past  seventy 
years.  When  these  large  losses  of  property  occur, 

[90] 


NATURE  OF  FIRE  INSURANCE 

money  must  be  immediately  paid  out  from  some 
source  to  replace  the  destroyed  property.  If  the 
state  is  conducting  the  fire  insurance  business, 
whether  in  competition  with  private  companies 
or  as  a  monopoly,  this  fact  will  demand  large  and 
immediate  payments  by  it  to  those  who  have  suf- 
fered the  loss.  Thus  will  be  introduced  a  problem 
of  financiering  for  the  state.  It  must  either  have 
been  accumulating  a  large  surplus  from  the  past 
premiums  collected,  or  it  must,  by  the  sale  of  bonds, 
secure  ready  money  to  pay  the  losses.  In  the  for- 
mer case  the  state  would  have  been  charging  such 
rates  in  excess  of  current  losses  as  would  accumu- 
late this  conflagration  surplus,  and  this  accumu- 
lated surplus  would  supposedly  be  carried  as  a 
deposit  in  financial  institutions.  In  the  case  of  a 
proposed  sale  of  bonds,  great  difficulty  and  prob- 
ably impossibility  would  arise.  The  effect  of 
attempting  to  market  by  any  one  state  sufficient 
bonds  to  pay  the  losses  of  a  San  Francisco  or 
Baltimore  fire  would  be  disastrous,  even  if  there 
were  not,  as  there  now  are  in  practically  all  states, 
certain  restrictions  upon  the  issue  of  state  bonds. 
Certain  formalities,  if  not  consent  of  the  legislative 
body,  would  be  necessary,  and  yet  the  fire  losses 
should  be  paid  as  quickly  as  possible. 

[91] 


INSURANCE  AND  THE  STATE 

There  is  nothing  in  life  insurance  to  correspond 
to  the  conflagration  in  fire  insurance.  To  argue 
that  plagues  establish  this  correspondence  is  as 
absurd  as  to  argue  that  conflagrations  are  unneces- 
sary. They  may  not  be  necessary,  but  they  are 
inevitable  so  long  as  our  present  methods  of  con- 
struction, fire  protection,  and  legal  theory  of  li- 
ability for  loss  are  continued. 

The  risk  in  fire  insurance  is  therefore  quite 
differently  affected  by  the  burning  rate  than  the 
risk  in  life  insurance  is  affected  by  the  mortality 
rate.  The  burning  rate  is  a  more  complex  factor ; 
it  is  made  up  of  many  incongruous  elements  which 
but  very  remotely  correspond  to  the  causes  of 
death.  It  is  true  that  there  is  what  is  called  an 
average  annual  fire  loss,  but  it  is  quite  a  different 
average  from  the  average  death  loss.  The  former 
is  made  up  of  many  fluctuating  factors.  The  latter 
is  comparatively  stable  over  long  periods  of  time. 

The  second  element  affecting  the  risk  in  fire 
insurance  is  the  investment  risk.  This  corre- 
sponds more  closely  to  the  investment  risk  in  life 
insurance,  in  so  far  as  in  both  cases  advance  pay- 
ments are  made  for  a  possible  loss,  and  these  ad- 
vance collections  must  be  kept  securely  and 
advantageously  invested.  The  problems  arising 

[92] 


NATURE  OF  FIRE  INSURANCE 

in  connection  with  the  investment  of  the  funds  in 
both  cases  are  much  the  same,  and  the  risk  ele- 
ment should  not  in  general  be  greatly  different. 
There  are,  however,  points  of  dissimilarity  in  the 
financial  aspects  of  life  and  property  insurance. 
The  contracts  in  fire  insurance  are  for  much  shorter 
periods  of  time  than  in  life  insurance.  They  usu- 
ally run  from  one  to  five  years,  and  this  means 
that  the  general  fund  is  made  up  of  many  more 
elements  which  are  continually  changing. 

In  the  case  of  life  insurance  the  assets,  with  the 
exception  of  a  nominal  capital  stock,  are  the  prop- 
erty of  the  policyholders,  and  the  officials,  whether 
of  a  stock  or  a  mutual  company,  are  very  largely 
in  the  position  of  trustees  of  the  funds.  But  in 
fire  insurance  a  larger  part  of  the  fund  does  not 
belong  to  the  policyholders.  From  one  point  of 
view  it  is  only  the  unearned  premium  reserve 
which  belongs  to  the  policyholder,  and  any  policy- 
holder's  interest  in  this  reserve  ends  at  the  close 
of  his  contract ;  that  is,  at  the  end  of  one  to  five 
years.  It  is  true  that  fire  insurance  companies 
accumulate  a  surplus  to  pay  unexpected  losses, 
as  in  the  case  of  a  conflagration,  but  to  argue  that 
a  policyholder  at  a  particular  time  owns  a  part 
of  this  surplus  which  may  be  used  ten  years  later 

[93] 


INSURANCE  AND  THE  STATE 

to  pay  a  conflagration  loss  when  this  policyholder 
is  no  longer  a  policyholder  is  stating  an  argument 
supported  neither  in  law  nor  morals. 

The  officials  of  a  life  insurance  company  are 
expected  to  invest  the  funds  of  the  company  so 
securely  and  so  safely  that  the  owners  of  the  fund 
may  not  only  be  assured  that  their  policies  will 
be  paid  when  they  mature,  but  also  that  they  may 
receive  either  dividends  on  participating  policies 
or  low  initial  costs  on  non-participating  policies. 
Indeed  the  sum  total  of  life  insurance  assets  is 
not  presumed  to  be  divided  at  any  one  time  among 
the  then  living  policyholders,  and  the  investment 
of  these  funds  so  that  good  returns  are  secured  is 
very  important.  But  the  policyholder  in  a  fire 
insurance  company  can  have  no  great  concern 
regarding  the  earnings  upon  the  investments  of  the 
company.  He  does  not  expect  a  dividend  unless 
perchance  he  is  a  member  of  a  mutual  company. 
But  these  companies  do  but  a  small  part  of  the 
fire  insurance  business  at  the*  present  time.  He 
is  chiefly  interested  in  knowing  that  his  loss,  if 
it  occurs,  will  be  paid  by  the  company.  Whether 
this  payment  comes  from  the  premiums  collected 
either  with  small  or  large  earnings  upon  them  is  a 
matter  for  the  officials  of  the  company  and  the 

[941 


NATURE  OF  FIRE  INSURANCE 

state  and  not  for  him.  It  is  true  that  competition 
among  companies  and  the  laws  of  the  state  do 
assure  certain  earnings  for  these  funds,  but  the 
policyholder  in  fire  insurance  has  neither  the  same 
right  to  nor  interest  in  the  earnings  on  fire  in- 
surance assets  as  in  life  insurance  assets. 

The  business  of  fire  insurance  is  conducted  by 
both  mutual  and  stock  companies.  In  1911  there 
were  325  domestic  and  foreign  stock  companies 
doing  business  in  the  United  States  and  268 
mutual  companies.  The  net  premiums  collected 
during  the  year  by  the  former  were  $225,795,533, 
and  by  the  latter  $36,618,986.  The  total  dis- 
bursements of  the  stock  companies  were  $306,799,- 
882  and  of  mutual  companies  $137,418,230. 

The  business  like  life  insurance  is  subject  to  the 
regulation  of  the  states,  with  the  result  that  great 
variation  in  the  method  of  regulating  the  business 
has  resulted.  Probably  the  conflict  in  state  leg- 
islation is  greater  in  the  case  of  fire  insurance  than 
in  life  insurance.  Fire  insurance  like  life  insur- 
ance is  essentially  mutual  in  its  character,  but  the 
degree  to  which  mutuality  can  be  applied  in  its 
actual  transaction  is  limited  both  by  practical 
considerations  and  theoretical  justification.  The 
principle  of  mutuality  always  implies  likeness,  and 

[95] 


INSURANCE  AND  THE  STATE 

it  has  been  shown  that  differences  are  more  char- 
acteristic of  property  for  insurance  purposes  than 
difference  among  individuals  for  life  insurance. 
In  the  one  case  the  dissimilarity  is  a  physical 
fact  entering  into  the  risk.  In  the  other  case  es- 
sential dissimilarity  has  been  eliminated  by  the 
medical  selection,  and  whatever  differences  remain 
do  not  materially  affect  the  risk. 

The  mutual  principle  in  fire  insurance  should  be 
limited  therefore  to  classes  of  property  which  have 
a  fair  degree  of  likeness  in  order  to  avoid  inequity 
in  costs.  If,  for  example,  the  owners  of  farm 
property  and  of  manufacturing  property  should 
ally  themselves  in  a  mutual  fire  insurance  associa- 
tion, the  differences  in  the  character  of  the  prop- 
erty, the  use  to  which  it  is  placed,  and  the  pro- 
tection about  it  from  fire  would  almost  certainly 
assure  that  one  group  would  be  bearing  the  burdens 
belonging  to  another.  Insurance  is  one  of  the 
costs  of  production,  and  the  consumers  of  a  partic- 
ular commodity  should  expect  to  pay  all  the  costs 
of  its  production  rather  than  to  permit  its  insur- 
ance cost  being  assessed  on  other  commodities. 
The  consumer  of  bread  should  not  be  asked  to 
pay  a  part  of  the  costs  of  producing  patent  medi- 
cines. 

[96] 


NATURE  OF  FIRE  INSURANCE 

It  was  thought  at  one  time  by  many  insurance 
officials  and  agents  that  classification  furnished 
the  real  solution  of  the  problem  of  rating.  Many 
people  who  are  not  versed  in  insurance  matters 
yet  believe  that  rates  can  be  based  wholly  on  the 
classification  of  losses  on  different  kinds  of  prop- 
erty and  business.  Experience  has,  however, 
proven  that  classification  in  itself  affords  no  solu- 
tion to  the  problem,  for  its  use  is  limited.  It  is 
desirable  to  have  the  tabulation  of  losses  on  dif- 
ferent classes  of  property ;  as,  for  example,  dwell- 
ing houses,  sprinklered  risks,  and  mercantile  risks, 
and  even  on  classes  of  property  within  these  gen- 
eral classes.  However,  it  is  only  the  general 
classification  which  is  of  great  significance  in  de- 
termining what  rates  are  adequate  and  equitable. 

In  retail  or  wholesale  mercantile  risks  there  are 
a  great  variety  of  concerns ;  as,  for  example,  retail 
grocery  stores,  hardware  stores,  drug  stores,  and 
likewise  a  great  variety  of  wholesale  establish- 
ments. If  it  were  attempted  to  make  a  rate  for 
each  of  these  detailed  classes,  interminable  diffi- 
culty would  be  experienced  without  any  promise 
of  equitable  or  fair  rates  for  the  purchaser  of  in- 
surance. The  scientific  schedules,  such  as  the 
Dean  or  Mercantile  Schedule,  do  not  attempt  to 
H  [97] 


INSURANCE  AND  THE  STATE 

make  a  rate  for  each  class  of  the  above  descrip- 
tion, but  rather  to  supply  a  method  of  assessing 
the  proper  charge  for  each  element  in  the  hazard. 
That  is  to  state,  these  schedules  rightly  assume 
that  a  defective  flue  in  a  grocery  store  is  quite  as 
significant  for  the  rater  in  producing  a  fire  loss 
as  an  equally  defective  flue  in  a  drug  store ;  that 
a  rubber  hose  connection  for  a  gas  fire  is  quite 
as  dangerous  in  a  wholesale  dry-goods  establish- 
ment as  in  a  wholesale  drug  house.  In  other 
words,  scientific  rating  seeks  to  appraise  the  hazard 
of  the  component  parts  of  a  risk  and  assess  the 
cost  upon  each.  It  does  not  attempt  to  classify 
risks  endlessly  and  make  a  flat  charge  upon  each 
on  the  basis  of  the  experienced  loss.  The  theory 
underlying  the  method  of  establishing  the  cost  of 
indemnity,  when  a  schedule  system  of  rating  is 
used,  has  been  well  explained  by  A.  F.  Dean,  the 
author  of  the  Dean  Schedule.  * '  Under  the  theories 
of  the  Analytic  Schedule,  —  the  Dean  Schedule- 
rating  is  not  called  rating,  because  as  a  system  it 
does  not  directly  seek  to  establish  the  selling  price 
of  the  fire  indemnity,  but  through  analysis  and 
classification  to  establish  the  amount  of  hazard  in 
each  risk  as  compared  with  other  risks.  The  an- 
alyzed parts  of  a  hazard  are  the  bricks  that  build 

[98] 


NATURE  OF  FIRE  INSURANCE 

up  the  total  hazard  of  each  risk,  and  as  bricks  may 
be  used  to  build  any  building,  so  the  parts  in  the 
schedule  may  build  up  the  estimate  of  any  risk. 
We  cannot  assume  that  risks  themselves  are 
amenable  to  the  law  of  average  without  assuming 
that  each  of  the  parts  are  equally  amenable  to 
average.  If  each  part  has  its  own  average,  this 
average  must  stand  in  a  permanent  quantitative 
relation  to  all  the  other  parts.  The  synthesis 
of  parts  that  establishes  the  quantity  of  hazard 
in  a  risk,  establishes  at  the  same  time  the  same 
permanent  quantitative  relation  between  the 
hazard  of  this  risk,  as  compared  with  all  other 
risks,  similarly  measured,  that  exists  among  the 
parts  themselves.  It  matters  not  what  trade  name 
a  risk  bears ;  for  if  its  hazard  has  been  measured 
by  the  same  scale  of  measurement,  it  stands  in  a 
position  of  permanent  relativity  to  other  risks, 
regardless  of  what  we  may  call  them.  Of  the  four 
main  divisions  of  fire  hazard  —  protection,  struc- 
ture, exposure  and  occupancy  —  the  last  and  only 
the  last  makes  the  hazard  of  one  property  class 
differ  from  another.  The  containing  building  may 
or  may  not  be  under  municipal  protection ;  it  may 
be  of  any  dimensions  or  character  of  material,  and 
it  may  be  unexposed  or  so  exposed  that  exposure 

[99] 


INSURANCE  AND  THE  STATE 

constitutes  the  greater  part  of  its  total  hazard. 
The  basis  rate  which  stands  for  unanalyzed  haz- 
ard does  not  in  theory  embody  any  of  the  hazard 
of  occupancy  because  it  serves  as  the  basis  upon 
which  the  charge  for  occupancy  is  superimposed." 


[100] 


CHAPTER  V 

SHOULD  THE  STATE  MONOPOLIZE  FIRE 
INSURANCE  ? 

AFTER  this  general  characterization  of  fire 
insurance  it  may  now  be  inquired  if  it  is  a 
business  suitable  for  state  activity.  The  inquiry 
may  be  pursued  again  on  the  ground  of  the  pur- 
pose of  the  assumption  of  fire  insurance  by  the 
state.  Should  the  state  assume  it  for  financial 
reasons,  or  as  a  means  of  securing  satisfactory 
regulation,  or  for  the  social  value  resulting  ? 

First,  then,  what  would  be  the  justification  for 
the  state  to  use  the  fire  insurance  business  as  a 
source  of  revenue  ?  This  calls  for  an  investiga- 
tion of  the  profits  which  stock  fire  insurance 
companies  make,  since  purely  mutual  companies 
return  all  excess  collections  to  their  policyholders. 
In  1911  there  were  325  stock  fire  insurance  com- 
panies doing  business  in  the  United  States,  with  a 
capital  of  $97,703,288.  Their  net  surplus  was 
$217,307,406.  The  dividends  paid  were  $12,637,- 
272,  or  13.9  per  cent  if  calculated  for  the  year  on 
[1011 


INSURANCE  AND  THE  STATE 

the  capital  stock,  a  result  which  gives  an  erroneous 
idea  of  the  actual  earnings  in  the  fire  insurance 
business,  as  will  be  shown  later.  The  above  sums 
are  impressive  and  would  seem  to  supply  a  large 
and  promising  source  of  revenue  for  the  state 
treasury. 

Every  stock  fire  insurance  company  has  two 
distinct  sources  of  income.  First,  the  earnings 
from  its  invested  funds,  and  second,  the  profits, 
if  any,  from  the  sale  of  its  policies.  With  the 
first  source  of  income  our  investigation  is  not 
concerned,  since  it  promises  no  source  of  revenue 
for  the  state.  There  is  no  reason  to  suppose  that 
the  state  would  be  able  to  secure  a  better  interest 
return  than  is  now  secured  by  the  companies. 
There  would,  of  course,  be  no  capital  stock  under 
state  fire  insurance.  It  may  be  urged  that  the 
state  could  use  the  funds  collected  as  premiums 
to  finance  the  state ;  that  is  to  say,  since  the  collec- 
tions would  be  in  excess  of  current  losses,  the  state  » 
might  receive  the  interest  on  this  excess.  Doubt- 
less this  contention  is  true,  but  such  a  gain  can 
scarcely  be  called  a  profit  or  a  legitimate  source 
of  revenue  for  the  state.  It  is  similar  to  the  earn- 
ings on  the  cash  in  hand  collected  by  taxation  in 
excess  of  current  state  needs.  This  balance  does 
[102] 


STATE  FIRE  INSURANCE 

produce  some  revenue,  but  the  insurance  receipts 
or  whatever  balance  on  them  was  held  could  not 
be  held  in  the  form  of  cash  on  hand.  The  state 
would  be  forced  to  invest  these  funds  in  securities 
just  as  the  companies  now  do.  The  state  would 
receive  interest  on  the  surplus  held  for  the  pur- 
pose of  meeting  losses,  especially  conflagration 
losses,  since  these  would  be  invested.  But  a  limi- 
tation on  the  character  of  this  investment  might 
cause  embarrassment.  These  funds  must  nec- 
essarily be  invested  in  rapidly  convertible  cash 
securities,  since  the  demand  for  these  funds  in  the 
case  of  a  conflagration  would  be  immediate  and 
large.  It  is  not  in  this  respect  that  the  state 
would  find  sufficient  warrant  for  taking  over  fire 
insurance  for  the  purely  financial  advantages. 
Such  a  gain  for  the  state  would  be  trivial.  There 
is,  however,  this  second  source  of  revenue,  namely, 
the  profits  which  now  go  to  private  insurance  com- 
panies from  the  sale  of  their  policies,  that  is,  the 
underwriting  profit. 

The  total  premiums  received  each  year,  less 
expenses  and  payments  made  for  fire  losses,  con- 
stitute this  profit  on  underwriting,  and  if  such  a 
profit  exists,  a  possible  source  of  revenue  for  the 
state  exists,  assuming  that  the  patrons  of  state 
[1031 


INSURANCE  AND  THE  STATE 

fire  insurance  would  be  willing  to  pay  in  premiums 
such  an  excess  and  not  insist  that  they  purchase 
their  indemnity  at  cost. 

Statistics  show  for  recent  ten-year  periods  that 
the  average  loss  is  about  60  per  cent  of  the  total 
premiums  and  the  average  expense  is  about  38 
per  cent  of  the  total  premiums.  The  38  per  cent 
is  divided  into  approximately  21  per  cent  for 
agents'  commissions  and  17  per  cent  for  salaries, 
rents,  and  other  operating  expense.  It  will  be 
observed  that  underwriting  cost  hovers  very 
closely  about  total  premium  collections.  In  some 
years  it  exceeds  them,  and  in  some  companies  it 
exceeds  them  for  a  number  of  years.  Yet  it  has 
been  stated  that  the  dividends  of  stock  fire  in- 
surance companies  of  1911  averaged  13.9  per  cent. 
Herein  lies  a  paradox  which  has  led  to  confusion 
in  the  minds  of  legislators  and  prospective  in- 
vestors in  fire  insurance  stocks.  The  percentages 
named  in  the  reports  of  companies  as  dividends 
earned  are  based  upon  the  capital  stock  and  not 
on  the  indemnity  sold.  There  is  a  wide  disparity 
between  the  capital  stock  on  which  dividends  are 
declared  and  the  actual  assets  which  earn  these 
dividends.  For  example,  a  company  may  have 
been  organized  thirty  years  ago  with  a  capital 
[104] 


STATE  FIRE  INSURANCE 

of  $200,000  and  now  have  net  assets  of  $2,000,000. 
Many  companies  do  not  increase  their  capital 
stock,  but  permit  whatever  underwriting  profit 
there  is  to  accumulate  as  a  surplus.  They  pay 
their  annual  dividends  from  the  earnings  on  their 
invested  assets.  The  above  company  might  de- 
clare, for  example,  a  dividend  of  100  per  cent,  but 
this  would  be  100  per  cent  on  their  capital  of 
$200,000,  which  would  be  but  10  per  cent  on  their 
invested  assets. 

The  statistics  of  the  National  Board  of  Fire 
Underwriters  show  that  for  the  decade  ending 
Jan.  1,  1900,  the  average  underwriting  profit 
was  about  one  third  of  a  cent  out  of  each  dollar  of 
premiums  received,  and  the  same  official  statistics 
for  the  years  1898-1910  show  the  following  facts. 
Of  114  companies  which  received  premiums  during 
the  decade  to  the  amount  of  $2,346,877,609  there 
was  paid  out  as  losses  and  underwriting  expenses 
$2,390,945,059,  or  a  ratio  of  losses  and  expenses 
to  premiums  income  of  101.8  per  cent.  Of  the 
one  hundred  leading  companies  operating  in  1910 
seventy-seven  made  an  underwriting  profit  and 
twenty-three  a  loss. 

This,  however,  proves  neither  that  fire  insurance 
is  transacted  at  a  loss  nor  that  there  would  be  no 
[105] 


INSURANCE  AND  THE  STATE 

source  of  revenue  for  the  state,  if  it  should  assume 
the  business.  The  above  figures  do  not  include 
the  earnings  from  the  investments  of  past  pre- 
miums upon  which  there  had  been  a  profit  and 
which  are  now  held  as  a  surplus ;  nor  do  they 
include  the  earnings  on  the  capital  stock,  al- 
though the  earnings  on  the  capital  stock  should 
not  be  considered  in  determining  the  question 
of  profitableness  of  the  fire  insurance  business 
for  the  state.  This  is  true  because  the  stock- 
holders might  withdraw  their  capital  and  invest 
it  in  other  enterprises  and  secure  the  normal 
return  on  capital,  and  the  state  would  not, 
in  case  it  assumed  the  business,  have  any  capi- 
tal stock  to  draw  an  interest.  Again,  the  sta- 
tistics include  the  large  sums  expended  as  ex- 
pense, and  it  might  be  that  this  expense  could  be 
reduced  under  the  state's  conduct  of  the  business. 
The  figures  do  show,  however,  that  as  the  business 
is  now  conducted  fire  indemnity  is  sold  practically 
at  cost ;  that  is  to  say,  the  average  annual  premium 
receipts  for  a  series  of  years  do  not  usually  exceed 
by  a  very  large  sum  the  average  annual  liabilities, 
due  to  the  fire  loss  and  the  expense  of  conducting 
the  business.  The  expenses  of  fire  insurance  have 
some  peculiar  characteristics.  In  the  first  place, 
[106] 


STATE  FIRE  INSURANCE 

it  is  an  expense  for  the  production  of  a  service, 
the  total  expense  of  which  cannot  be  known  at 
the  time  of  the  sale.  In  the  production  of  most 
commodities  the  total  expense  for  their  produc- 
tion is  fairly  definitely  known  in  advance,  and  the 
price  of  the  commodity  bears  in  general  a  very 
definite  relation  to  the  total  expenses  of  produc- 
tion. But  in  fire  insurance  the  seller  of  the  in- 
demnity does  not  know  at  the  time  of  sale  what 
it  will  finally  cost  him  to  pay  the  indemnity.  The 
future  alone  can  disclose  how  much  property  will 
be  burned.  For  example,  a  certain  company  paid 
out  last  year  $94  out  of  each  $100  collected  in 
premiums  on  a  certain  class  of  risks  which  were 
written  on  a  three-year  contract.  There  remains 
$6  out  of  which  to  pay  the  losses  of  the  remaining 
two  years  of  the  contract.  This  is  not  an  espe- 
cially exceptional  case  nor  is  it  a  company  which 
carelessly  writes  business.  In  the  second  place, 
fire  insurance  is  conducted  as  a  retail  business,  and 
therefore  it  is  subject  to  all  the  numerous  expenses 
of  a  middleman  business.  From  the  local  agent 
to  the  general  agent,  to  a  department,  and  then  to 
the  home  office  is  a  long  road  with  many  toll 
takers.  In  the  third  place,  the  expense  element  is 
affected  by  so  great  a  number  of  changing  factors 
[1071 


INSURANCE  AND  THE  STATE 

that  the  past  serves  as  a  very  imperfect  guide 
for  the  future. 

A  brief  analysis  of  fire  insurance  expenses  may 
be  given  with  a  view  of  discovering  the  possible 
sources  of  reduction.  At  the  close  of  1911  the  com- 
panies reporting  to  the  New  York  Department  of 
Insurance  showed  a  total  expense  item  of  $116,- 
900,483.  Of  this  total  $24,140,938  was  paid  for 
salaries  and  wages  for  home  office  employees. 
This  was  approximately  an  expenditure  of  4.4 
per  cent  on  their  $535,000,000  assets  and  .0058 
per  cent  on  the  $40,000,000,000  value  of  the  prop- 
erty insured.  The  losses  on  investments  and 
securities  sold  during  the  year  were  $788,343,  and 
for  other  expenses,  excluding  commissions,  the 
sum  of  $27,125,528  was  paid.  These  expenses 
include  many  items,  such  as  rent,  advertising, 
traveling  expenses,  and  taxes.  Deducting  the 
above  sums  from  the  total  expenses  of  $116,900,- 
483,  there  remains  $64,842,912  which  was  paid 
for  commissions.  It  is  possible  that  some  saving 
might  be  effected  from  a  number  of  the  minor  items 
of  expenses,  such  as  advertising,  rents,  etc.,  but 
since  no  one  of  these  in  the  aggregate  is  a  very 
large  item,  the  saving  on  them  as  a  whole  could  not 
very  materially  affect  the  cost  of  insurances. 
[1081 


STATE  FIBE  INSURANCE 

The  three  large  items  in  the  expense  are:  (a) 
for  salaries,  (6)  for  taxes,  and  (c)  for  commissions. 
It  is  not  believed  that  the  officials  of  fire  insurance 
companies  as  a  class  are  overpaid.  There  are 
doubtless  examples  as  in  any  other  class  of  business 
where  the  officials  of  the  company  are  paid  an 
unduly  high  salary,  but  there  are  no  monopolistic 
conditions  from  which  fire  insurance  officials  as  a 
class  are  able  to  benefit. 

As  to  taxes,  there  is  a  possibility  of  great  saving. 
The  report  shows  that  the  fire  insurance  com- 
panies paid  in  1911  over  $8,000,000  as  taxes  and 
license  fees.  If  this  were  reduced  to  the  propor- 
tion which  fire  insurance  companies  should  pay  to 
maintain  efficient  insurance  departments  in  the 
states,  a  very  considerable  saving  could  be  ac- 
complished. There  is,  however,  no  immediate 
prospect  that  taxes  will  be  reduced.  Insurance 
companies  afford  to  legislatures  in  these  days  of 
increasing  state  and  local  expenditures  an  easy 
and  available  source  of  revenue,  criteria  for  taxa- 
tion which  have  always  appealed  to  the  legislator, 
regardless  of  the  essential  justice  of  the  tax. 

It  is  probably  the  third  item,  the  commissions, 
which  will  appeal  to  many  as  the  largest  possible 
source  of  saving.  This  $64,842,912  for  commis- 

[1091 


INSURANCE  AND  THE  STATE 

sion  represents  somewhat  over  12  per  cent  of  the 
assets  of  the  companies  and  22.05  per  cent  on  the 
average  premium  receipt.  The  Year  Book  of  the 
Spectator  Company  shows  that  the  average  com- 
mission in  1860  was  about  11  per  cent,  in  1890 
about  18  per  cent,  and  in  1900  about  20  per  cent. 
The  difference  in  the  average  commission  paid  in 
1900  and  the  present  is  therefore  less  than  3  per 
cent.  The  statistics  of  the  United  States  Bureau 
of  Labor  show  that  the  retail  price  of  food  in- 
creased 16.1  per  cent  between  the  years  1899  and 
1906.  This  translated  into  the  language  of  the 
market  means  that  the  dollar  of  the  fire  insurance 
agent  now  buys  him  much  less  of  consumable 
commodities. 

The  chief  criticism  on  commissions  is  not,  how- 
ever, that  commissions  as  a  whole  are  too  high,  but 
that  for  certain  agents  and  for  certain  classes  of 
risks  unnecessary  amounts  are  paid.  Mr.  S.  R. 
Barton,  State  Auditor  of  Nebraska,  in  a  recent  ad- 
dress shows  that  over  $9,000,000  would  have  been 
saved  during  the  year  1911  if  the  graded  commis- 
sion plan  of  the  Western  Union  had  been  observed. 
It  is  urged  that  preferred  risks  are  often  a  source 
of  unnecessarily  high  commissions  as  well  as  a 
source  of  discrimination.  It  has  also  been  sug- 
[1101 


STATE  FIRE  INSURANCE 

gested  that  agents'  commissions  be  paid  only  on 
that  portion  of  the  premium  represented  by  a 
rate  of  1  per  cent  or  less. 

It  has  been  suggested  that  a  general  limitation 
be  placed  on  expense.  If  a  law  should  be  passed, 
limiting  the  amount  which  could  be  expended  to 
some  fixed  ratio,  as,  for  example,  35  or  40  per  cent, 
the  effect  would  be  to  retire  a  number  of  companies 
and  to  place  a  great  strain  upon  a  number  of  other 
companies.  However,  such  a  law  might  achieve 
a  very  desired  end  for  the  buyer  of  insurance, 
especially  if  a  carefully  devised  law  for  regulating 
rates  was  enacted. 

If  the  question  of  a  state  monopoly  of  fire 
insurance  is  considered  strictly  on  the  basis  of 
its  possibilities  of  yielding  a  revenue  to  the  state, 
yet  another  question  must  be  investigated.  This 
is  the  subject  of  taxation.  If  financial  considera- 
tions alone  govern,  the  state  must  realize  that  it 
will  lose  the  revenue  now  secured  by  taxation. 
This  is  not  an  inconsiderable  sum,  as  is  shown  by 
the  amount  of  taxes  paid  by  the  one  hundred  and 
eighty  companies  reporting  to  the  New  York 
Insurance  Department.  This  amount  in  1911 
aggregated  $8,236,529.  Viewed  as  a  financial 
problem  alone,  the  state  would  need  to  make  econ- 

rini 


INSURANCE  AND  THE  STATE 

omies  in  the  expense  of  conducting  the  business, 
which  would  at  least  be  equal  to  the  taxes  received 
in  order  to  avoid  a  financial  loss.  It  is  true  that 
the  state  would  receive,  as  the  private  companies 
now  do,  an  interest  return  on  whatever  surplus 
it  would  build  up,  but  it  must  be  understood  that 
a  surplus  in  the  case  of  state  fire  insurance  would 
arise  only  from  excess  annual  charges  for  fire 
indemnity.  There  would  be  no  capital  stock. 
What  the  capital  stock  of  private  companies  now 
earn  is  of  no  public  concern,  unless,  perchance,  it 
be  unduly  high.  The  stockholders  might  with- 
draw their  capital  in  fire  insurance  and  secure  the 
normal  return  in  other  investments. 

It  must  be  recognized  that  certain  elements  in 
the  expenses  of  fire  insurance  as  contrasted  with 
life  insurance  are  of  a  more  permanent  character 
whether  the  business  be  conducted  by  private 
companies  or  by  the  state.  Advances  in  knowl- 
edge concerning  insurance  and  the  benefits  which 
it  has  may  reduce  the  cost  of  persuading  people 
to  buy  both  life  and  fire  insurance.  But  in  fire 
insurance  the  inspection  work  connected  with 
securing  a  risk  and  retaining  it  is  quite  different 
from  the  medical  examination.  A  large  corps  of 
inspectors  will  be  necessary  in  fire  insurance, 
[112]  * 


STATE  FIRE  INSURANCE 

not  only  to  examine  thoroughly  the  risk  when  it 
is  written,  but  also  to  examine  it  from  time  to  time, 
either  when  the  policy  is  renewed  or  to  see  that 
proper  care  is  exercised  in  the  use  of  the  property. 
Indeed  no  other  weakness  in  the  fire  business  at 
present  is  more  productive  of  evil  and  inequitable 
results  than  this  absence  of  adequate  inspection. 
Much  more  should  be  spent  in  inspection  work 
than  is  now  the  case.  No  other  one  thing  would 
tend  so  forcefully  to  reduce  the  useless  fire  waste. 
Companies  complain  that  this  would  largely 
increase  the  expense,  but  it  is  quite  probable  that 
in  time  the  costs  of  fire  protection  would  decrease. 
If  companies  would  more  readily  cancel  policies 
when  the  hazard  of  occupancy  unduly  and  un- 
necessarily increased  on  account  of  careless  use 
of  the  property,  and  refused  to  accept  risks  until 
a  careful  inspection  had  been  made,  losses  heavy 
in  the  aggregate  would  be  avoided,  and  hence  the 
rate  would  be  favorably  affected.  This  practice 
would  enforce  more  careful  building  and  more 
careful  use  of  property.  The  excuse  offered  by 
the  companies  is  that  competition  forces  them  to 
follow  the  old  policy.  It  is  an  expensive  kind  of 
competition  for  which  the  consumer  —  the  prop- 
erty owner  —  is  paying  a  high  price, 
i  [113] 


INSURANCE  AND  THE  STATE 

A  second  purpose  of  the  state  entering  the  busi- 
ness might  be  for  the  purpose  of  complete  regula- 
tion. This  would  necessarily  involve  a  state 
monopoly,  and  the  justification  of  the  assumption 
must  be  decided  on  the  basis  of  the  necessity  for 
regulation.  The  particular  reasons  for  the  regu- 
lation of  the  business  by  a  state  monopoly  would 
again  be,  as  in  the  case  of  life  insurance:  (a)  is 
monopoly  threatened  under  private  ownership  ? 
(6)  is  the  competition,  if  it  exists,  of  a  kind  by 
which  the  public  is  injured  by  unnecessarily  high 
or  inequitable  charges  ?  (c)  is  the  business  of  a 
peculiar  character  which  makes  regulation  diffi- 
cult and  unsuccessful  ? 

Monopoly  would  be  indicated  most  clearly 
either  by  a  consolidation  of  previously  competing 
organizations  and  failure  of  new  competing  com- 
panies to  be  organized  or  by  the  evidence  of  agree- 
ments as  to  charges  by  ostensibly  competing 
organizations.  The  Fire  Insurance  Year  Book 
shows  that  there  were  325  stock  companies  and 
268  mutual  companies  operating  in  the  United 
States  at  the  close  of  1911,  and  statistics  since 
1860  show  further  that  the  average  number  of 
companies  for  each  decade  has  tended  to  increase. 
It  is  a  well-known  fact  that  new  fire  insurance 
[114] 


STATE  FIRE  INSURANCE 

companies  are  frequently  organized,  although  only 
a  small  per  cent  of  the  new  companies,  especially 
the  new  stock  companies,  ever  prove  a  success. 
At  the  close  of  1911  there  were  148  fire  and  fire- 
marine  insurance  companies  in  the  hands  of  re- 
ceivers. Practically  all  the  large  and  markedly 
successful  fire  insurance  companies,  whether  stock 
or  mutual,  but  especially  the  former,  are  compa- 
nies which  have  been  in  business  for  more  than  a 
decade.  These  facts  might  seem  to  be  presump- 
tive evidence  of  the  existence  of  some  kind  of 
monopolistic  power,  but  such  is  not  the  case.  At 
least  there  is  no  artificial  monopoly  power  to  pre- 
vent the  organization  and  operation  of  fire  in- 
surance companies. 

There  are,  however,  very  great  obstacles  in  the 
very  character  of  the  business  which  make  the 
chance  of  new  companies  succeeding  much  less 
than  for  new  organizations  in  most  industrial  fields. 
This  is  not  because  there  is  any  real  surplus  of 
fire  indemnity  for  sale  in  respect  to  the  demand. 
In  the  large  centers  of  population  there  is,  in 
general,  a  dearth  of  indemnity  for  sale.  This  is 
due  to  the  fact  that  many  companies  do  not 
write  risks  in  the  congested  districts  and  all  com- 
panies limit  the  amount  of  property  which  they 
[115] 


INSURANCE  AND  THE  STATE 

will  insure  in  such  districts.  Then  again  there  is 
much  property  upon  which  either  no  insurance 
or  an  inadequate  amount  of  insurance  is  carried. 
In  1911  the  one  hundred  and  eight  leading  fire 
insurance  companies  had  outstanding  policies 
which  covered  $46,276,992,650  of  property,  but 
this  does  not  represent  the  market  value  of  all 
insurable  property  in  the  United  States. 

Nor  are  the  legal  requirements  regarding  the 
formation  of  a  company  difficult  to  meet.  Yet  the 
net  book  as  well  as  the  market  value  of  practically 
every  one  of  the  one  hundred  and  seventy-five 
fire  insurance  companies  is  well  over  the  par  value 
of  the  stock.  This  last  fact  is  to  be  explained  by 
the  usually  common  practice  of  selling  the  stock 
of  a  fire  insurance  company  at  a  premium  in  order 
to  lay  the  foundations  of  that  surplus  which  is 
essential  to  the  success  of  every  fire  insurance 
company. 

It  is  also  in  connection  with  this  surplus  that  the 
chief  explanation  of  the  frequent  failure  of  new 
companies  is  to  be  found.  The  new  company 
has  the  heavy  initial  expense  of  organization ;  of 
selling  its  stock;  of  securing  an  agency  force. 
It  must  then  go  into  the  field  and  compete  with 
the  old-established  companies  to  secure  business. 
[116] 


STATE  FIRE  INSURANCE 

It  may  find  it  a  difficult  matter  to  secure  the  better 
class  of  risks.  It  may  endeavor  to  secure  them  by 
cutting  rates,  but  the  old  established  company 
can  afford  to  meet  this  competitive  rate.  It 
may  offer  the  inducement  to  the  agent  who  proba- 
bly represents  both  companies  of  a  commission 
which  will  secure  the  business  for  it.  The  old 
company  is  a  going  concern  and  is  presumed  to  be 
efficient,  having  already  secured  sufficient  business 
to  bring  whatever  economies  there  are  from  large 
scale  operation.  If  the  new  company  does  secure 
the  good  risk,  it  may  have  been  forced  to  make 
such  concessions  that  a  favorable  return  on  the 
risk  will  not  be  secured.  If  it  is  forced  to  accept 
the  poor  risk,  it  is  likewise  in  an  unfavorable 
position  to  secure  a  good  return.  Yet  it  must 
secure  business  on  such  rates  that  a  surplus  can 
be  gradually  accumulated  for  that  time  which  is 
almost  certain  to  come  to  every  fire  insurance  com- 
pany when  the  losses  are  heavy.  This  may  be 
caused  by  a  heavy  loss  on  several  large  risks  in 
several  localities  or  it  may  be  caused  by  a  destruc- 
tive fire  in  a  particular  locality. 

The  report  of  the  Superintendent  of  Insurance 
for  New  York  in  1911  shows  that  from  the  time  of 
the  establishment  of  the  department  in  1859  until 
11171 


INSURANCE  AND  THE  STATE 

the  close  of  the  above  year  188  stock  and  mutual 
fire  insurance  companies  had  gone  out  of  business. 
Of  the  105  companies  reporting  to  that  department 
in  1871  only  19  were  in  business  in  1902.  Forty- 
six  of  the  companies  organized  since  1871  had 
retired  by  1911.  In  short,  more  than  three  fourths 
of  all  the  companies  in  business  in  1871  had  retired 
within  the  next  twenty  years  and  two  thirds  of  all 
those  organized  since  1871  had  retired  within  the 
next  twenty  years.  Yet  new  companies  are  con- 
tinually being  formed,  and  at  the  close  of  1911 
there  were  in  that  state  162  fire  insurance  com- 
panies reporting  to  the  state  department  of  in- 
surance. 

The  facts,  therefore,  do  not  show  that  a  monop- 
oly exists  either  from  a  consolidation  of  existing 
companies  or  from  a  failure  of  new  companies  to 
be  organized.  Whatever  limitations  exist  in  the 
latter  particular  result  from  the  natural  obstacles 
to  the  establishment  of  a  successful  fire  insurance 
company  and  not  in  any  artificially  established 
restrictions. 

But  the  evil  of  a  monopoly  may  occur  if  ostensi- 
bly competing  organizations  have  agreements 
as  to  the  charges  which  will  be  exacted  from  the 
consumers  of  the  product.  What  evidence  is  there 

nisi 


STATE  FIRE  INSURANCE 

that  the  charges  for  fire  indemnity  are  practically 
the  same  among  the  independent  and  competing 
companies  ?  It  may  be  stated  at  once  that  such 
uniformity  exists  to  a  very  large  degree.  It  may 
also  be  stated  further  that  there  are  very  good 
reasons  for  the  existence  of  this  uniformity,  so  far 
as  it  is  determined  by  the  burning  rate  and  not  by 
the  expense  of  management  and  commissions. 
And  further  that  a  larger  degree  of  uniformity 
would  probably  result  in  an  improvement  in  the 
fire  insurance  business  and  ultimately  in  a  lower 
cost  of  indemnity  to  property  holders. 

This  calls  for  a  brief  explanation  of  how  the 
rates  are  determined.  This  is  an  unexplainable 
mystery,  it  would  seem,  if  the  laws  of  several  states 
and  the  complaints  of  some  property  holders  are 
taken  as  criteria  of  the  human  understanding. 
Yet  there  is  nothing  mysterious  about  fire  rates. 
While  there  is  as  much  reason  for  difference  in  the 
premium  for  fire  insurance  policies  among  different 
companies,  so  far  as  the  expense  element  of  the 
charge  is  concerned,  as  there  is  among  producers  of 
other  commodities,  yet  so  far  as  the  rate  is  deter- 
mined by  the  actual  loss  or  burning  rate  on  differ- 
ent kinds  of  property,  there  should  be  no  difference. 
No  greater  number  of  drug  stores  insured  in  one 
[119] 


INSURANCE  AND  THE  STATE 

company  will  burn  because  they  are  insured  in 
that  company  rather  than  in  another  company, 
provided  the  selection  has  been  well  made  and  the 
risks  distributed.  It  is  therefore  not  the  expense 
rate,  but  the  burning  rate  to  which  the  explanation 
is  directed.  Why  should  cost  be  uniform  in  all 
companies  for  this  element,  and  how  is  this  cost 
determined  ? 

Each  industry,  and  therefore  each  class  of  prop- 
erty, should  bear  its  costs  of  producing  a  com- 
modity. Fire  insurance  is  one  of  the  elements  in 
the  cost  of  production.  Therefore  the  burning 
rate  in  each  industry  should  form  the  proper  basis 
for  the  insurance  charge.  Under  our  system  of 
state  regulation  of  insurance  and  the  insistence  of 
some  state  legislatures  that  the  burning  rate  in 
the  particular  state  be  taken  as  the  basis,  injustice 
may  indeed  result,  because  the  number  of  plants 
or  producing  units  may  indeed  be  too  few  to  form 
the  basis  for  a  fair  average.  Mutuality  should 
be  and  must  be  the  elementary  principle  in  all 
insurance,  but  mutuality  must  have  a  sufficiently 
wide  basis  if  it  is  to  be  just.  But  in  fire  insur- 
ance mutuality  must  also  be  restricted;  that 
is  to  say,  it  should  be  limited  to  classes  of 
property,  but  with  a  wide  application  within  the 
[120] 


STATE  FIRE  INSURANCE 

class.  It  is  advisable,  then,  to  have  a  classification 
of  property  and  a  record  of  the  losses  on  each  class. 
Nor  is  the  experience  of  one  company  sufficient 
to  establish  the  rate,  even  if  its  experience  extends 
for  a  long  period  and  over  the  whole  country. 
The  combined  experience  of  all  companies  on  all 
classes  of  property  can  only  afford  a  satisfactory 
basis  for  rate  making. 

The  two  systems  generally  used  in  this  country 
for  rating  mercantile  property  are  the  Universal 
Mercantile  Schedule  and  the  Dean  Schedule. 
These  schedules  apply  to  mercantile  property 
which  includes  by  far  the  most  important  risks, 
both  as  to  value  and  number  of  risks.  Other 
schedules  are  used,  but  in  all  of  them  there  is  the 
attempt  to  analyze  the  elements  in  a  risk  on  the 
basis  of  its  contribution  to  losses  actual  or  potential. 
The  rating  of  properties  is  usually  not  directly 
done  by  the  insurance  companies  themselves,  but 
by  numerous  rating  bureaus  found  in  all  the  im- 
portant cities.  These  bureaus  are  independent  of 
the  companies  and  sell  their  service  to  the  com- 
panies in  the  same  manner  that  the  makers  of  fire 
insurance  maps  do.  It  is  the  business  of  such 
bureaus  to  inspect  properties  which  they  rate  and 
to  make  general  surveys  of  cities  for  the  purpose 
[121] 


INSURANCE  AND  THE  STATE 

of  establishing  a  rating  for  them,  based  upon  such 
numerous  elements  as  kinds  of  buildings,  water 
systems,  and  the  equipment  of  fire  departments. 
Since  their  service  is  sold  indiscriminately  to  all 
companies,  there  is  no  reason  for  them  to  overrate 
or  underrate  the  risks.  These  facts,  briefly  stated, 
account  for  a  large  part  of  the  uniformity  in  the 
rates  of  all  companies  so  far  as  this  is  a  uniformity 
determined  by  the  burning  rate.  In  other  cases 
and  on  other  classes  of  property  the  experience 
of  companies  forms  the  basis  of  the  charge. 

There  have  been  many  attempts  to  forbid  the 
companies  from  exchanging  their  experiences.  A 
number  of  states  have  passed  Anti-Compact  laws 
which  seek  to  forbid  companies  from  exchanging 
their  experience  and  agreeing  on  rates.  The  intent 
of  the  framers  of  these  laws  has  doubtless  been 
good,  and  no  doubt  unlimited  freedom  in  such 
matters  should  be  restricted.  Yet  it  is  certainly 
desirable  to  have  collected  experience  of  such 
companies  as  a  basis  upon  which  to  make  fair  rates. 
What  is  needed  is  not  a  law  to  prohibit  such  an 
exchange  and  such  agreements,  but  to  compel 
this  exchange  of  experience  and  an  agreement  on 
rates  under  the  supervision  of  the  state. 

The  burning  rate  in  fire  insurance  is  a  changing 
[122] 


STATE  FIRE  INSURANCE 

factor,  due  to  the  changing  character  of  construc- 
tion material,  of  building  codes,  and  of  improved 
protection.  The  public  has  witnessed  the  Com- 
panies changing  rates  for  one  reason  or  another, 
now  to  a  higher  plane  and  now  to  a  lower  plane, 
and  has  immediately  concluded  that  evil  designs 
have  been  made  by  the  companies  against  them. 
This  may  have  been  true  in  a  number  of  cases, 
but  in  most  cases  it  has  been  due  only  to  the  chang- 
ing character  of  the  risks. 

The  method  of  rating  has  been  constantly  im- 
proved, although  no  one  claims  for  it  perfection. 
Indeed  there  cannot  be  any  perfect  and  closed 
rate  established;  for,  as  has  been  shown,  the  uncer- 
tain factors  in  the  risk  are  continually  changing. 
The  most  that  can  be  expected  or  demanded  is 
that  rates  be  determined  upon  property  in  a 
scientific  manner  and  that  equity  be  secured  be- 
tween classes  of  property  insured.  In  order  to 
secure  this  end  there  must  be  available  the  experi- 
ence of  many  companies  on  the  different  classes 
of  risks,  and  an  analysis  of  these  losses  made. 

It  would  then  appear  that  the  chief  element  in 

the  cost  of  fire  indemnity,  that  is,  the  prime  charge 

for  property  loss  and  not  for  expense,  should  be 

the  same  for  all  companies.     There  might  be  even 

[1231 


INSURANCE  AND  THE  STATE 

then  very  good  reasons  for  the  enactment  of  anti- 
compact  laws ;  but  if  such  were  the  case,  the  purpose 
of  enacting  such  laws  should  be  somewhat  different 
from  that  which  the  states  that  have  such  laws 
have  had  in  mind. 

There  have  been  and  now  are  agreements  among 
companies  as  to  the  commission  which  a  company 
should  pay  to  an  agent  for  securing  the  business, 
and  it  would  seem  that  such  agreements  might  be, 
under  proper  supervision,  in  the  interests  of  the 
public  rather  than  opposed  to  public  policy  as 
many  suppose.  A  favorite  device  frequently 
employed  by  recently  organized  companies  to 
secure  business  has  been  to  offer  high  rates  of 
commission.  Rate  wars  have  occurred  among 
companies  over  a  particular  risk,  the  risks  of  a 
city  or  even  a  state,  and  as  a  result  indemnity  has 
sometimes  been  sold  at  far  less  than  cost.  After 
the  contest  was  over  rates  have  been  advanced  to  a 
normal  basis.  It  is  not  surprising  that  the  public, 
which  is  not  versed  in  the  insurance  business,  has 
concluded  that  companies  were  conspiring  against 
them  when  they  have  been  told  that  a  new  policy 
on  their  property  would  cost  more  than  the  old 
one  or  when  it  was  announced  that  rates  for  the 
city  or  district  had  been  advanced  without  any 
[124] 


STATE  FIRE  INSURANCE 

apparent  change  in  the  character  of  the  risks. 
The  acts  of  the  companies,  quite  as  much  as  the 
ignorance  of  the  public  concerning  insurance,  have 
been  responsible  for  the  anti-compact  laws  of  the 
various  states.  It  may  well  be  contended  that  the 
state  would  be  justified  in  establishing  a  certain 
maximum  of  expense,  especially  in  reference  to 
the  commission,  which  shall  be  permitted.  If  the 
state  should  establish,  for  example,  40  per  cent  as 
the  maximum  expense  which  would  be  permitted, 
this  would  undoubtedly  make  it  difficult  for  some 
companies  to  continue  in  business  and  some  would 
be  forced  to  retire.  But  if  other  companies  could 
meet  this  requirement  and  if  sufficient  indemnity 
would  be  offered  for  sale,  there  would  seem  to  be 
no  good  reason  why  the  public  —  the  state — should 
be  forced  to  subsidize  inefficient  insurance  com- 
panies by  permitting  such  a  high  rate  of  expense  as 
would  make  it  possible  for  any  group  of  individuals 
to  form  an  insurance  company  and  continue  to  do 
business  regardless  of  the  rate  of  expense  at  which 
the  business  was  transacted. 

If  commissions  were  also  limited,  this  would, 
with  the  preceding  general  limitation  on  expense, 
make  it  more  difficult  for  new  companies  to  enter 
the  field;  but  again  if  sufficient  indemnity  is 

[1251 


INSURANCE  AND  THE  STATE 

offered  for  sale,  and  if  competition  is  present  and 
adequate  regulation  of  rates  has  been  secured, 
there  is  no  reason  why  the  public  should  be  inter- 
ested in  having  new  companies  formed. 

The  probable  effect  of  such  limitations  would  be 
to  encourage  the  formation  of  a  greater  number  of 
purely  mutual  fire  insurance  organizations  and  to 
secure  the  existence  of  a  number  of  highly  success- 
ful and  efficient  stock  companies.  Many  would 
hold  that  such  a  situation  would  be  preferable  to 
the  past  condition  with  many  new  stock  companies 
being  formed,  many  of  which  have  failed  and 
entailed  loss  to  the  public  both  on  the  insurance 
purchased  and  the  stock  held. 

Doubtless  many  officials  of  insurance  companies 
would  agree  that  commissions  for  writing  the  busi- 
ness have  frequently  been  unnecessarily  high. 
Agreements  have  been  made  and  are  now  in  force 
among  some  companies  to  regulate  the  commission 
paid,  but  it  has  always  been  difficult  to  secure 
cooperation  on  this  subject  and  adherence  to  the 
agreement.  Some  of  the  older  companies  have 
refused  to  cooperate  on  this  subject,  and  most  of 
the  new  companies  have  refused  to  agree  on  com- 
missions. The  refusal  is  frequently  made  because 
offering  the  higher  commission  was  the  easiest 
[126] 


STATE  FIRE  INSURANCE 

method  for  the  new  company  to  secure  the  risks. 
It  is  an  unfortunate  kind  of  competition  for  which 
the  public  has  been  forced  in  the  last  analysis  to 
pay.  It  is  the  same  kind  of  "cut-throat"  com- 
petition which  prevailed  in  the  railway  business  in 
the  days  when  there  were  no  state  laws  or  state 
commissions  to  regulate  rates. 

It  is  believed  that  there  are  even  better  reasons 
for  regulating  commissions  for  selling  fire  insur- 
ance than  for  establishing  railway  rates.  Cer- 
tainly the  difficulty  in  determining  a  fair  and  just 
price  for  the  service  rendered  is  not  so  great. 

The  companies  themselves  would  still  have 
ample  opportunity  to  use  their  skill,  foresight,  and 
ability  in  reducing  the  other  elements  in  the  ex- 
pense, securing  better  results  from  their  invest- 
ments, and  in  short  so  managing  the  company  as  to 
secure  a  profit  for  the  stockholders  and  perhaps  a 
lower  charge  to  the  public  for  the  service.  That  is 
to  state,  the  regulation  of  commissions,  or  even  the 
total  expense,  would  take  away  none  of  the 
important  incentives  which  private  business  now 
has  to  secure  profit  for  itself  and  to  produce  good 
service  for  the  public. 

To  summarize,  then,  the  evidence  of  monopoly  as 
shown  by  agreements  on  rates.  It  is  found  that 
[127] 


INSURANCE  AND  THE  STATE 

independent  rating  bureaus  do  most  of  the  work 
in  determining  the  rates  on  mercantile  risks; 
that  schedules  for  rating  are  used  for  certain 
classes  of  property  in  which  an  analysis  of  the 
elements  in  the  risk  is  made,  and  finally  that  com- 
pulsory compact  laws  are  needed  to  replace  anti- 
compact  laws.  This  would  mean  that  the  com- 
panies would  be  permitted  to  make  their  rates  on 
the  basis  of  the  experience  of  losses  of  all  com- 
panies on  all  classes  of  property  under  the  super- 
vision of  the  state. 

There  remains  much  to  be  done  in  securing 
scientific  rates,  and  especially  is  greater  equity  in 
these  rates  to  be  desired ;  but  the  absence  of  these 
desirable  ends  does  not  prove  the  existence  or 
danger  of  a  monopoly  in  the  fire  insurance  busi- 
ness. New  companies  are  being  formed.  Foreign 
companies  are  admitted  to  the  various  states  for 
the  purpose  of  selling  fire  indemnity.  Capital  is 
flowing  into  and  out  of  the  business ;  for  it  does  not 
take  the  form  of  such  fixed  capital  as  machinery, 
tools,  or  factories,  which  is  the  case  in  other  indus- 
tries. It  retains  its  mobility.  There  would  seem 
to  be  no  necessity  for  the  state  to  assume  the  busi- 
ness of  fire  insurance  simply  because  the  state  is 
not  now  able  to  regulate  it.  The  states  have 
[128] 


STATE  FIRE  INSURANCE 

ample  power  in  this  respect,  and  whatever  injus- 
tices and  inequities  there  are  in  rates  could  no 
more  easily  be  corrected  by  the  state's  assumption 
of  the  business  than  by  exercising  its  wide  power 
of  regulating  the  business. 

Indeed  there  would,  under  a  state  monopoly  of 
the  business,  be  a  very  strong  inducement  for  the 
state  to  use  its  own  experience  as  a  basis  for  the 
determination  of  rates,  and  this  geographical  unit 
is  much  less  satisfactory  than  a  wider  one.  In 
fact  the  state  would  probably  be  forced  to  use  such 
a  unit,  and  such  a  unit  is  practically  unworkable 
with  justice  to  the  insured.  For  example,  the  per 
capita  fire  loss  in  Ohio  had  fallen  to  $1.20  in  1911, 
whereas  in  the  United  States  it  was  almost  $3. 
Would  not  the  people  of  Ohio  insist  that  the  state 
be  taken  as  the  unit  of  area  for  rate-making  pur- 
poses under  state  insurance  ?  Any  satisfactory 
classification  would  scarcely  be  possible,  owing 
to  the  limited  number  of  representatives  of  an 
industry,  unless  a  combination  of  risks  should  be 
made.  One  state  might  have  but  three  flouring 
mills,  and  yet  injustice  might  result  if  a  large  group 
of  manufacturing  plants  should  be  used  to  form  a 
class.  Then,  again,  the  loss  owing  to  a  conflagra- 
tion in  a  city  would  entail  a  marked  increase  in  rates 
*  [ 129  ] 


INSURANCE  AND  THE   STATE 

for  a  single  state.  Consider  but  a  moment  the 
cost  to  the  people  of  California  if  they  were  com- 
pelled to  meet  the  losses  due  to  the  San  Francisco 
earthquake  and  fire. 

The  truth  of  the  matter  regarding  fire  insurance 
rates  is  that  they  are  very  complex  and  present 
many  more  difficulties  in  arriving  at  and  main- 
taining a  fair  charge  than  do  many  other  serv- 
ices or  commodities.  Railway  charges,  for  exam- 
ple, present  no  such  difficulties  as  do  fire  insurance 
rates.  The  former  have  to  do  with  more  station- 
ary elements. 

Would  the  state  be  warranted  in  going  into  the 
fire  insurance  business  for  the  purpose  of  more 
satisfactorily  regulating  it  ?  It  has  been  shown 
that  the  state  has  complete  power  of  regulation. 
Supreme  courts  have  time  and  again  given  expres- 
sion to  this  fact.  For  example,  the  power  of  the 
legislature  to  delegate  to  a  commissioner  of  insur- 
ance the  right  to  deny  admission  to  a  foreign  com- 
pany or  to  withdraw  the  right  to  do  business  has 
been  upheld.  Some  states  have  even  gone  to  the 
extreme  point  of  passing  a  law  under  which  a 
foreign  company  forfeited  its  right  to  do  business 
in  the  state  in  the  event  that  it  removed  to  the 
federal  court  a  suit  brought  against  it  by  a  citizen 
[130] 


STATE  FIRE  INSURANCE 

of  the  state.  Although  this  would  seem  to  deny 
a  right  granted  by  the  Constitution  of  the  United 
States,  yet  such  laws  for  all  practical  purposes  are 
in  operation. 

It  is  not  primarily  a  question  of  lack  of  power  to 
regulate,  but  rather  a  question  of  how  to  regulate 
it.  The  rates  may  be  too  high  in  some  cases  and 
inequitable  in  other  cases,  but,  judging  by  the  char- 
acter of  legislation  frequently  enacted,  there  is 
little  hope  that  the  rates  under  a  state  monopoly 
would  be  absolutely  just  to  all  classes.  As  a 
matter  of  fact  no  means  have  been  devised  to 
secure  absolutely  scientific  rates.  If  the  state 
should  discover  such  a  means,  it  can  force  the  com- 
panies to  use  it.  There  will  doubtless  be  greater 
accuracy  in  determining  rates  as  time  goes  on,  but 
so  long  as  the  country  is  in  process  of  rapidly  chang- 
ing its  industrial  life,  so  long  will  the  numerous 
changing  factors  which  go  to  make  up  fire  insur- 
ance rate  demand  readjustments.  That  is  to 
say,  when  our  cities  are  built,  when  our  industries 
become  organized,  and  when  our  business  experi- 
ence is  systemized,  there  will  be  that  uniformity 
and  standardization  of  processes  and  products 
which  characterizes  a  stable  industrial  life. 
Industrially  the  country  is  yet  in  its  infancy,  and 
[1311 


INSURANCE  AND  THE  STATE 

the  growth  to  maturity  must  be  accompanied  by 
frequent  changes  and  readjustments. 

This  is  not  to  state  that  this  coming  stability 
will  mean  the  absence  of  progress  and  therefore  the 
disappearance  of  changes,  but  the  changes  will 
not  be  of  a  revolutionary,  but  of  an  evolutionary 
c  haracter .  The  readjustments  will  be  more  gradual 
and  constructive  in  their  character.  A  standard 
city,  a  standard  building,  and  a  standard  fire 
department  will  then  imply  more  definite  things 
in  fire  insurance  than  they  now  do,  and  therefore 
standard  rates  will  have  a  greater  degree  of  accu- 
racy in  them. 

There  yet  remains  for  investigation  the  third 
suggested  reason  for  the  state  assuming  the  busi- 
ness of  fire  insurance,  viz.  the  social  interests  which 
the  state  would  be  able  to  serve  by  assuming  the 
business.  This  question  must  very  largely  be 
decided  upon  the  possibility  of  reducing  the  fire 
loss  or  the  fire  waste  under  the  state. 

The  following  table  shows  the  fire  losses  for  the 
past  36  years  :  — 


1912 
1911 
1910 
1909 
1908 
1907 

$225,320,900   1906 
234,337,250   1905 
234,470,650   1904 
203,649,200   1903 
238,562,250   1902 
215,671,250   1901 

459,710,000 
175,193,800 
252,554,050 
156,195,700 
149,260,850 
164,547,450 

[132 


STATE  FIRE  INSURANCE 


1900 

$163,362,250   1888 

110,885,000 

1899 

136,772,200   1887 

120,283,000 

1898 

119,650,500   1886 

104,924,000 

1897 

110,319,650   1885 

102,818,700 

1896 

115,655,500   1884 

110,008,600 

1895 

129,835,700   1883 

110,149,000 

1894 

124,246,400   1882 

84,515,000 

1893 

156,445,875   1881 

81,280,000 

1892 

151,516,000   1880 

74,643,400 

1891 

143,764,000   1879 

77,703,700 

1890 

108,993,700   1878 

64,315,900 

1889 

123,046,800   1877 

68,265,800 

This  aggregates  a  total  of  $5,406,666,325  for 
the  thirty-six  years,  or  an  annual  average  loss  of 
$150,185,175.69.  These  statistics  do  not  include 
the  numerous  losses  which  are  never  reported  and 
upon  which  no  insurance  was  carried.  The  statistics 
of  the  National  Board  of  Fire  Underwriters  for  1911 
show  that  the  per  capita  loss  for  cities  of  20,000  and 
over  was  $2.62,  an  increase  of  twenty-three  cents 
over  1910.  A  comparison  for  the  United  States  as  a 
whole  shows  that  more  than  one  third  of  the  total 
loss  is  borne  by  one  third  of  the  population.  The 
statistics  also  seem  to  show  that  as  between  urban 
and  rural  communities  losses  on  property  under 
the  better  class  of  protection  have  abnormally 
increased,  while  losses  on  property  with  poorer 
protection  have  grown  less.  This  is  a  forceful 
commentary  on  the  unpredictable  character  of 
the  fire  loss.  Comparing  the  $2.62  per  capita 
[133] 


INSURANCE  AND  THE  STATE 

loss  in  our  cities  with  that  in  the  cities  of  foreign 
countries  the  following  results  are  shown.  Eleven 
out  of  twelve  of  the  largest  cities  in  England  had  a 
per  capita  loss  under  one  dollar.  Belfast  in  Ireland 
had  a  loss  of  ninety-three  cents  per  capita  and 
Dublin  thirteen  cents ;  Aberdeen  in  Scotland  had 
a  loss  of  thirty-seven  cents  and  Edinburgh  a  loss 
of  sixty-six  cents  per  capita ;  Marseilles  in  France 
had  a  loss  of  $1.27  and  Paris  a  loss  of  sixty  cents ; 
eight  of  the  largest  cities  in  Germany  had  a  per 
capita  loss  that  averaged  twenty- three  cents ; 
six  of  the  largest  cities  in  Italy  had  an  average  per 
capita  loss  of  thirty-one  cents  ;  Moscow  in  Russia, 
where  wood  is  frequently  used,  had  a  per  capita 
loss  of  $1.46  and  St.  Petersburg  ninety-three 
cents. 

No  country  other  than  one  of  such  enormous 
natural  resources  and  vigorous  population  as  the 
United  States  would  be  able  to  endure  such  losses 
by  fire,  and  even  in  the  United  States  the  losses 
have  become  so  great  that  serious  attention  must 
soon  be  given  to  their  reduction.  We  have  had  such 
a  large  fund  of  natural  wealth,  and  we  have  be- 
lieved so  thoroughly  in  individual  liberty,  that  we 
have  neither  felt  the  need  of  economy  in  this 
particular,  nor  would  we  probably  have  been 


STATE  FIRE  INSURANCE 

willing  to  circumscribe  our  personal  liberties, 
even  if  we  had  recognized  the  uselessness  of  much 
of  the  loss.  Timber  has  been  abundant;  the 
demand  for  new  buildings  has  been  pressing,  and 
the  increase  in  industrial  development  has  been 
so  great  that  any  building  erected  would  need 
soon  to  be  replaced.  We  have  preferred  to  permit 
construction  and  use  under  very  few  limitations. 
Our  practice,  if  not  supported  by  good  theory,  has 
been  to  build,  to  burn,  and  rebuild  and  burn, 
rather  than  to  build  a  permanent  building  which 
would  prove  a  loss  either  because  it  would  soon  be 
too  small  or  because  of  the  development  of  another 
section  of  the  city  or  of  another  city. 

This  fire  loss  represents  an  enormous  loss  of 
social  capital.  It  is  a  burden  on  present  and 
future  generations  of  which  much  is  unnecessary. 
That  there  is  insurance  on  the  destroyed  property 
reduces  the  burden  only  in  part  for  the  individual. 
The  fact  that  other  persons  contribute  to  a  fund 
from  which  the  insured  receives  money  to  replace 
the  destroyed  property  does  not  alter  the  essential 
fact  that  property  has  been  forever  destroyed. 
Yet  the  losses  continue  to  increase  until  the  prob- 
lem has  become  one  that  should  demand  more 
attention.  It  is  one  of  the  really  important 
[1351 


INSURANCE  AND  THE  STATE 


aspects  of  the  conservation  problem  of  the  country. 
It  is  sometimes  offered  as  an  indictment  of  private 
fire  insurance,  that  this  fire  loss  tends  to  increase. 
The  following  table  shows  the  increase  in  losses 
by  decades  for  the  years  1880  to  1910,  together 
with  the  increase  in  wealth. 


YEARS 

INCREASE  IN 
WEALTH 

PER 
CENT 
IN- 
CREASE 

INCREASE 
IN  INSURABLE 
PROPERTY 

PER 
CENT 
IN- 
CREASE 

INCREASE 
IN  Loss  IN 
PROPERTY 

PER 
CENT 
IN- 
CREASE 

81-90 

21,395,091,000 

49 

17,456,482,609 

35.6 

91-00 

23,480,215,775 

36 

33,412,378,537 

50.4 

294,674,675 

28 

01-10 

18,586,905,142 

20 

91,600,352,352 

90.7 

898,246,125 

66 

A  study  of  the  table  shows  that  the  percentage 
of  property  insured  has  tended  to  increase  very 
rapidly,  so  that  an  increasing  proportion  of  the 
wealth  is  insured.  Unfortunately  the  table  shows 
that  during  the  past  decade  the  percentage  of 
increase  in  the  loss  of  property  has  been  over  three 
times  the  percentage  increase  in  wealth.  A  desir- 
able condition  would  be  for  the  percentage  in- 
crease of  insured  property  to  be  greater  than  the 
percentage  increase  in  wealth,  and  the  percentage 
increase  of  loss  in  property  to  be  less  than  the  per- 
centage increase  in  wealth. 

The  questions  then  arise,  are  these  losses  inevi- 
[136J 


STATE  FIRE  INSURANCE 

table  and  would  they  more  probably  be  reduced 
under  a  system  of  state  insurance  than  under 
private  fire  insurance  ?  One  of  the  determining 
factors  in  this  unusually  large  fire  loss  is  the  fact 
that  our  buildings  are  so  largely  constructed  of 
wood.  Careless  construction  and  occupancy, 
careless  habits  on  the  part  of  the  public,  as,  for  ex- 
ample, in  their  use  of  friction  matches,  ill-advised 
legislation,  poor  building  codes,  inadequate  fire 
fighting  equipment,  each  contributes  to  the  loss, 
but  each  of  these  is  more  potent  in  causing  the 
loss  because  our  buildings  are  constructed  of 
highly  inflammable  material.  Over  60  per  cent 
of  our  buildings  are  yet  being  constructed  of  wood, 
and  so  long  as  it  is  to  the  financial  interest  of  an 
individual  to  build  of  wood,  it  will  be  only  a  ques- 
tion of  how  much  the  loss  can  be  reduced.  It  is 
not  necessary  to  make  a  harsh  indictment  of  the 
American  people  for  their  materialism  in  this  con- 
nection, for  those  of  the  human  race  who  build  of 
stone  do  so  because  this  material  is  available,  and 
therefore  it  is  to  their  financial  interests  as  indi- 
viduals to  do  so.  Analysis  of  the  causes  of  fire 
made  by  a  prominent  insurance  company  and 
covering  the  losses  for  a  period  of  the  past  nine 
years  in  79,931  fires  shows  that  lightning  was 
[1371 


INSURANCE  AND  THE  STATE 

responsible  for  8.31  per  cent  of  the  losses,  incendi- 
ary 4.90  per  cent,  carelessness  19.44  per  cent, 
lighting  14.05  per  cent,  heating  21.06  per  cent, 
vacancy  .09  per  cent,  sparks  4.09  per  cent,  explo- 
sions, etc.,  13.62  per  cent,  spontaneous  combustion 
2.77  per  cent,  rats  and  mice  1.30  per  cent. 

What  do  private  insurance  companies  do  to  re- 
duce this  loss  ?  Have  they  any  interest  in  its 
reduction  or  is  it  their  concern  simply  to  assess  the 
loss  ?  Is  it  true,  as  is  sometimes  stated,  that  their 
interest  stops  with  determining  the  premium,  and 
that  they  would  be  interested  in  keeping  the  loss 
large,  since  this  would  mean  more  business  to  be 
transacted  ?  Any  one  conversant  with  the  prac- 
tice of  fire  insurance  companies  knows  that  they 
do  a  vast  amount  of  work  which  directly  tends  to 
reduce  the  fire  loss.  Not  only  are  inspectors  em- 
ployed to  investigate  risks,  but  policy  holders  are 
advised  as  to  methods  of  improving  their  risks  in 
order  to  reduce  the  premium.  Many  companies 
have  public  service  departments  which  give  sug- 
gestions as  to  methods  of  construction  which  will 
secure  a  lower  insurance  rate  on  the  property. 
Policies  are  canceled  in  risks  when  careless  use  of 
the  property  is  discovered.  It  is  true  that  much 
more  inspection  work  might  be  done  by  the  com- 
[1381 


STATE  FIRE  INSURANCE 

panics,  but  so  long  as  all  do  not  do  it,  competitive 
conditions  prevent  single  companies  from  doing 
an  unlimited  amount  of  it,  lest  the  cost  be  reflected 
in  a  higher  rate  than  their  competitors  offer. 
Could  not  the  state  attack  this  problem  of  the 
fire  loss  with  greater  prospect  of  reducing  it  than 
is  likely  to  occur  under  any  plan  of  private  insur- 
ance? 

Would  the  justification  be  any  greater  for  the 
state  to  do  this  in  the  event  that  it  took  over  the 
business  than  that  which  now  exists  under  a  sys- 
tem of  private  insurance  ?  To  the  extent  that  this 
work  would  be  or  is  now  undertaken,  the  interest 
and  value  to  its  citizens  would  form  the  basis  for 
such  activity.  If  the  state  took  over  the  business, 
doubtless  much  of  the  work  in  reducing  the  unneces- 
sary fire  loss  could  be  done  in  connection  with  the 
department  of  insurance.  The  concentration  of 
the  inspection  work  would  probably  be  accom- 
panied by  economies  over  the  present  method ;  for 
there  is  now  under  competitive  conditions  some 
duplication,  although  the  primary  inspection  and 
rating  work,  so  far  as  it  is  done  by  Rating  Bureaus, 
avoids  much  of  the  duplication.  But  the  reduc- 
tion of  the  unnecessary  fire  loss  is  not  simply  a 
question  of  better  inspection  work.  It  is  a  ques- 
f  1391 


INSURANCE  AND  THE  STATE 

tion  partly  of  carelessness,  partly  of  economic 
interest  to  the  individual  in  building  cheaper  and 
more  inflammable  buildings,  and  partly  of  criminal 
acts.  The  causes  therefore  cannot  be  removed 
at  once,  for  there  is  no  mysterious  power  residing 
in  the  state  by  which  the  moral  character  and 
economic  interests  of  man  can  be  immediately 
changed.  The  state  can  probably  do  as  much  in 
reducing  this  under  a  system  of  private  insurance 
as  under  state  insurance.  Whether  the  actual 
cost  to  the  public  would  be  less  or  greater,  we  have 
no  means  of  deciding.  In  many  states  the  people 
have  already  recognized  the  importance  of  the 
problem  and  are  working  on  its  solution.  A  num- 
ber of  states  have  established  departments  under 
the  direction  of  a  Fire  Marshal.  It  is  the  duty 
of  this  official  to  inspect  buildings  and  condemn 
them,  and  even  destroy  them  if  they  are  not  safe 
to  use.  He  may  also  order  improvements  to  be 
made  in  buildings  and  order  fire  escapes  placed  on 
buildings.  He  investigates  the  causes  of  fires, 
collects  and  tabulates  fire  statistics,  issues  pam- 
phlets on  the  subject  of  causes  of  fires,  methods 
of  preventing  or  controlling  them,  and  in  general 
conducts  a  campaign  of  public  education  in  fire 
prevention.  He  also  has,  as  an  important  duty, 
[140] 


STATE  FIRE  INSURANCE 


the  discovery  and  prosecution  of  cases  of  willful 
destruction  of  property.  This  work  is  already 
showing  its  results  in  those  states  which  have 
efficient  departments  of  this  character,  but  the 
work  needs  to  be  greatly  developed,  not  only  in 
each  state  now  doing  it,  but  each  state  should 
carry  on  work  of  this  kind. 

In  Ohio  the  Fire  Marshal's  office  was  estab- 
lished in  1900,  and  a  comparative  statement  of  the 
fire  losses  by  years  for  the  decade  is  as  follows :  — 


Y*AB 

NUMBER  or  FIRES 

Loss 

1901 

7011 

$11,196,789 

1902 

5194 

8,000,000 

1903 

6025 

7,797,995 

1904 

5812 

6,850,578 

1905 

4851 

6,112,707 

1906 

4448 

6,991,111 

1907 

4534 

7,077,702 

1908 

5322 

6,681,703 

1909 

4544 

6,537,061 

1910 

4724 

6,952,320 

There  can  be  no  doubt  of  the  social  justification 
of  the  work,  and  its  need  would  exist  even  under  a 
system  of  state  insurance.  It  is,  however,  neces- 
sary that  the  people  who  pay  for  the  cost  of  such 
service,  which  reflects  itself  in  a  lower  fire  loss, 
[1411 


INSURANCE  AND  THE  STATE 

should  receive  a  return  in  lower  premium  charges 
on  their  insured  property.  This  again  suggests 
the  necessity  for  a  closer  supervision  of  fire  rates 
by  the  state  if  the  system  of  private  insurance  is 
continued. 

In  connection  with  this  subject  of  reducing  the 
fire  loss  the  valued-policy  laws  of  a  number  of 
states  arise.  These  laws  provide  in  general  that 
the  sum  named  in  the  policy  shall  at  the  time  of  the 
fire  be  considered  as  conclusive  evidence  of  the 
indemnity  to  be  paid.  These  laws  have  probably 
raised  very  materially  the  cost  of  insurance,  for  they 
tempt  the  dishonest  property  owner  to  burn  his 
property.  Such  laws  are  an  incentive  to  dis- 
honesty first,  because  they  make  it  advanta- 
geous for  the  individual  to  misrepresent  facts  in 
order  to  secure  insurance  in  excess  of  the  actual 
value  of  the  property,  and  second,  in  making  it 
to  his  advantage  to  willfully  burn  his  overvalued 
property. 

Legislators  have  frequently  made  the  mistake 
of  placing  the  whole  subject  on  a  personal  basis  by 
arguing  that  it  was  of  no  one's  concern  if  an  indi- 
vidual wished  to  go  into  the  insurance  market  and 
to  purchase,  for  example,  $6000  worth  of  insurance. 
But  insurance  is  not  sold  like  potatoes.  An  insur- 
[142] 


STATE  FIRE  INSURANCE 

ance  company  sells  indemnity.  An  individual 
might  buy  a  bushel  of  potatoes  when  he  needed 
only  a  peck  without  jeopardizing  any  public  inter- 
est or  doing  an  injury  to  another  person,  but  an 
individual  cannot  purchase  $6000  worth  of  in- 
demnity on  $4000  worth  of  property  without 
doing  all  other  honest  buyers  of  insurance  an 
injury.  It  means  that  the  extra  $2000  must  be 
donated  by  the  other  holders  of  insurance  to 
the  individual  who  suffered  a  $4000  loss.  Yet 
strange  as  it  may  seem,  valued-policy  laws  and 
State  Fire  Marshals  are  found  in  the  same  state. 
Thus  the  state  passes  a  law  to  make  a  thief  and 
appoints  by  law  an  official  to  catch  the  thief. 

The  historical  background  which  explains  the 
valued-policy  law  is  that  in  the  early  history  of 
fire  insurance  the  policy  was  limited  in  its  terms  to 
pay  losses  only  to  the  amount  of  three  fourths 
of  the  actual  loss.  But  unscrupulous  agents  en- 
couraged, especially  in  agricultural  communities, 
an  overinsurance  which  at  the  time  of  the  loss  could 
never  be  collected.  The  wrong  needed  to  be 
righted,  but  the  remedy  was  an  absurd  one.  Some- 
thing could  be  done  to  reduce  the  unnecessary  fire 
loss  by  repealing  these  valued-policy  laws  and  re- 
placing them  with  laws  requiring  more  careful 
[143] 


INSURANCE  AND  THE  STATE 

inspection  of  property  and  more  careful  use  of 
property. 

Another  law  on  the  statute  books  of  many  states 
which  also  affects  the  fire  loss  is  the  anti-coinsure 
law.  Coinsurance  is  the  plan  by  which  the  insured 
agrees  to  carry  a  part  of  the  risk  in  case  of  a  loss 
when  the  amount  insured  is  not  equal  to  a  certain 
percentage  of  the  property's  value.  It  is  just  as 
important  that  property  be  not  insured  for  too 
small  a  proportion  of  its  value  as  not  to  be  insured 
for  more  than  its  value.  Rates  cannot  be  scien- 
tifically and  equitably  fixed  unless  there  is  some 
uniformity  in  the  basis  of  assessing  the  cost. 
The  present  method  of  determining  rates  is,  as 
has  been  described,  to  make  each  individual  risk 
contribute  its  equitable  proportion  of  the  total 
sum  collected  for  loss  payments.  Each  risk  is 
credited  with  its  good  features  and  debited  with 
its  bad  ones,  thereby  encouraging  good  building 
and  occupancy.  Suppose  now  that  the  rate  thus 
determined  is  1  per  cent  on  a  building  worth 
$50,000.  This  is  done  upon  the  assumption  that 
the  building  will  be  insured  for  $40,000,  or  80  per 
cent  of  its  value,  and  it  will  therefore  contribute 
$400  to  the  aggregate  sum  collected  to  pay  losses. 
If  the  owner,  however,  purchases  only  $20,000 
[144] 


STATE  FIRE  INSURANCE 

worth  of  indemnity,  the  contribution  to  the  sum 
for  losses  will  be  only  $200  and  the  insurance  com- 
pany will  be  in  error  in  its  calculations  50  per 
cent.  This  50  per  cent  error  must  be  made  up  by 
other  policyholders,  and  consequently  the  average 
rate  which  they  pay  must  be  increased.  The 
point  may  be  made  clear  by  comparing  the  insur- 
ance rate  with  a  tax  rate.  Suppose  the  value  of 
the  taxable  property  in  a  district  is  $50,000,000 
and  the  expenses  to  be  met  by  taxation  are 
$1,000,000.  If  it  levies  a  tax  of  2  per  cent,  this 
sum  will  be  raised.  If,  however,  one  fifth  of  the 
property  holders  who  own  $10,000,000  worth  of 
the  property  are  permitted  to  enter  their  property 
for  taxation  at  $5,000,000  and  the  2  per  cent  tax 
is  collected,  they  will  pay  only  $100,000,  whereas 
they  should  have  paid  $200,000.  The  remaining 
property  holders  must  pay  the  other  $100,000  if 
the  total  sum  of  $1,000,000  for  the  community's 
expenses  is  to  be  raised.  Just  as  in  taxation,  where 
it  makes  no  great  difference  at  what  per  cent  of 
valuation  the  property  is  assessed,  whether  100  per 
cent,  80  per  cent,  or  50  per  cent,  so  it  is  uniform  on 
all  property,  so  in  insurance  rating  it  makes  no 
great  difference  whether  the  property  is  valued 
at  100  per  cent,  80  per  cent,  or  50  per  cent,  so  long 
L  [  145  ] 


INSURANCE  AND  THE  STATE 

as  it  is  uniform.  Owing  to  the  fact  that  the  value 
of  property  frequently  changes,  it  is  the  practice  to 
base  the  rate  on  an  80  per  cent  valuation ;  but  any 
other  rate  would  make  possible  scientific  rating. 
For  any  value  above  the  agreed,  the  owner  is  the 
insurer ;  that  is  to  state,  he  is  a  coinsurer  with  the 
company. 

In  Europe  and  in  marine  insurance,  coinsurance 
is  the  rule,  and  there  is  scarcely  any  doubt  that  a 
system  of  state  insurance  would  apply  the  princi- 
ple of  coinsurance.  The  coinsurance  principle 
works  no  hardships  on  the  owner  in  case  either  of  a 
large  or  of  a  small  loss  if  the  amount  of  insurance 
which  he  carries  is  equal  to  or  in  excess  of  the  per- 
centage of  the  whole  value  of  the  property  which 
the  coinsurance  clause  demands.  It  only  becomes 
a  factor  when  there  is  a  partial  loss  which  destroys 
a  smaller  percentage  of  the  value  of  the  property 
than  that  agreed  upon  in  the  coinsurance  clause. 
A  repeal  then  by  the  states  of  the  valued-policy 
and  anti-coinsurance  laws  and  greater  supervision 
of  rates  would  do  something  to  bring  about  greater 
equity  in  rates  and  reduce  the  fire  loss. 

This  suggests  another  reason  assigned  for  a 
state  monopoly  of  insurance,  viz.  to  secure  greater 
equity  in  rates.  This  means  that  if  ideal  equity  is 
[146] 


STATE  FIRE  INSURANCE 

to  be  secured,  there  will  be  the  complete  absence  of 
discrimination.  Discrimination  may  occur  be- 
tween persons,  between  places,  and  between 
classes  of  property.  So  soon  as  one  attempts 
to  lay  down  an  ideal  system  of  making  fire  insur- 
ance rates  which  will  be  absolutely  free  from  dis- 
crimination, it  is  very  easy  to  criticize  the  plan 
both  on  the  basis  of  theory  and  practice.  It  is  easy 
to  state  that  each  class  of  property  should  bear 
its  cost  of  fire  indemnity,  but  there  are  endless 
problems  in  the  matter  of  classification  as  well  as  in 
determining  what  the  loss  and  the  causes  of  the 
loss  are.  Absolute  equity  as  between  individuals 
does  not  exist  in  any  business.  The  consumer  is 
forced  to  purchase  almost  daily  commodities  at  a 
price  inequitable  as  compared  with  the  price  to 
some  other  purchases  even  in  the  same  locality. 
He  buys  from  his  corner  drug  store  an  article  which 
he  could  have  purchased  for  much  less  than  the 
cost  of  transportation  to  another  place.  His 
grocery  man  is  continually  raising  and  lowering  his 
prices  on  a  scale  different  from  that  of  another 
groceryman  in  the  same  city. 

In  life  insurance  the  individual  pays  a  charge 
which   has   been   determined   previously   by   the 
mortality  experience  of  those  of  similar  physical 
[147] 


INSURANCE  AND  THE  STATE 

conditions  and  the  same  age.  But  in  fire  insur- 
ance this  charge  is  continually  changing.  Annual 
experience  of  losses  on  property  must  be  supple- 
mented with  good  underwriting  judgment  which 
should  be  the  result  of  observing  and  studying  past 
experience  in  order  to  secure  fair  fire  insurance 
rates.  Discriminations  of  every  character  cannot 
be  removed,  but  some  of  them  can  be  reduced.  If 
careful  analysis  of  losses  on  kinds  of  property  is 
made,  and  if  the  experience  extends  over  sufficient 
time,  regions,  and  amounts  of  property,  a  basis  for 
fair  rates  is  supplied.  Certainly  little  excuse 
could  then  be  offered  for  discrimination  between 
persons  owning  the  same  kind  of  property.  Like- 
wise discrimination  among  places  on  the  same  class 
of  property  could  not  be  justified.  Discrimina- 
tions among  classes  of  property  are  doubtless  more 
difficult  to  avoid,  but  carefully  tabulated  experi- 
ence of  losses  would  hardly  justify  the  difference 
on  certain  classes  of  property  which  now  exists. 
It  is  in  this  connection  that  the  state  conduct  of 
the  business  would  make  greatest  change,  but 
this  result  might  as  well  be  accomplished  by  the 
state  under  the  present  system  of  private  insur- 
ance. It  is  probably  because  the  public  has  but 
imperfectly  recognized  this  defect  and  because 
[148] 


STATE  FIRE  INSURANCE 

of  their  general  ignorance  regarding  insurance  that 
these  numerous  examples  of  misdirected  fire  insur- 
ance legislation  are  found. 

If  the  business  of  fire  insurance  is  to  continue 
under  private  ownership,  it  is  necessary  for  those 
interested  in  it  to  cease  uselessly  complaining  about 
the  burden  of  insurance  legislation  and  begin  a 
campaign  of  educating  the  public.  The  com- 
panies must  work  out  a  system  of  closer  coopera- 
tion and  bring  into  the  rates  greater  equity.  The 
public  is  becoming  more  critical  of  all  business, 
and  its  criticisms  promise  to  be  constructive  rather 
than  destructive.  If  competition  and  cooperation 
among  companies  cannot  result  in  fair  rates, 
there  are  but  two  choices.  These  are  rates  deter- 
mined by  the  state  for  the  companies  or  rates  made 
by  the  state  for  its  own  monopoly  of  insurance. 
There  is  among  insurance  officials  a  disposition 
when  the  question  of  rate  regulation  by  the  state 
arises  to  dispose  of  the  whole  question  by  stating 
that  it  cannot  be  done.  Yet  in  the  case  of  rail- 
ways it  has  been  done  and  experiments  are  now 
being  made  in  what  practically  amounts  to  making 
fire  rates  by  the  state.  If  these  attempts  should 
prove  successful,  and  if  private  insurance  does  not 
make  improvements  both  as  to  greater  equity 
[149] 


INSURANCE  AND  THE  STATE 

and  in  possible  reductions  in  expense,  state  insur- 
ance may  easily  be  the  logical  result. 

The  people  are  intrusting  more  and  greater 
activities  to  the  state,  and  the  efficiency  of 
government  is  increasing  rapidly.  In  so  far  as 
this  efficiency  is  shown  by  achieved  results, 
in  so  far  will  the  state  commend  itself  to  its 
citizens  as  worthy  of  being  intrusted  with  new 
activities. 

Some  general  considerations  on  the  question  of  a 
state  monopoly  of  fire  insurance  remain.  If  the 
insurance  is  made  compulsory,  the  agency  expense 
could  doubtless  be  reduced.  Viewed  simply  as 
an  activity  of  the  state  for  purely  social  benefit, 
there  would  seem  to  be  no  good  reasons  why  fire 
insurance  should  not  be  made  compulsory.  Prop- 
erty exists  and  is  subjected  to  the  danger  of  a  loss 
by  fire,  by  means  of  which  society  is  made  to 
suffer.  The  value  of  the  property  is  comparatively 
easy  to  determine.  Insurance  is  the  only  method 
known  by  means  of  which  the  loss  can  be  reduced. 
If  a  social  risk  exists  and  can  thus  be  reduced  by  a 
well-known  method,  compulsion  by  the  state  for 
the  social  benefit  has  good  grounds  upon  which  to 
rest.  Only  the  limited  number  of  representatives 
of  property  in  particular  classes  would  be  a  bar 
[150] 


STATE  FIRE  INSURANCE 

for  a  determination  of  rates  quite  as  accurate  as 
and  probably  more  so  than  those  which  now  exist 
under  private  insurance.  There  would,  however, 
be  no  reason  why  the  state  could  not  use  the  experi- 
ences of  losses  in  other  states  to  aid  it  in  determin- 
ing its  rates  unless  practical  politics  or  local  sen- 
timent and  prejudice  would  insist  upon  a  state 
experience  of  losses  for  rate  making.  A  con- 
flagration would  probably  present  a  difficult 
problem  for  a  system  of  state  insurance. 

The  state  would  accumulate  a  surplus,  but  such  a 
surplus  would  not  need  to  be  as  large  as  the  aggre- 
gate surplus  of  the  private  companies.  The  con- 
centration of  the  surplus  would  thus  reduce  its 
amount  and  leave  in  the  possession  of  the  public 
a  part  of  the  funds  now  collected.  The  sums  not 
collected  under  state  insurance  would  remain  in 
private  hands  for  productive  purposes.  It  is 
true  that  the  surplus  now  collected  by  private  com- 
panies is  loaned  at  interest  and  thus  productively 
employed,  but  it  is  quite  possible  that  something 
might  be  gained  by  permitting  the  excess  to  remain 
in  the  possession  of  the  numerous  contributors. 
The  surplus  collected  by  the  state  would  also  be 
productively  employed  if  it  were  placed  in  financial 
institutions  and  loaned  to  the  private  investor. 
(1511 


INSURANCE  AND  THE  STATE 

The  particular  disposition  of  this  surplus  and  the 
form  it  would  take  would  need  to  be  carefully 
worked  out.  It  would  need  to  be  in  such  a  form  as 
to  realize  quickly  upon  it.  It  might  be  placed  in 
financial  institutions  which  would  pay  to  the  state 
an  interest  upon  it,  from  the  interest  which  the 
financial  institution  received  from  loaning  it. 
Just  as  in  life  insurance  so  in  fire  insurance  the 
premium  paid  is  spent  for  management,  for  com- 
missions and  other  expenses,  and  for  losses.  If  the 
first  and  second  elements  in  the  expense  can  be 
eliminated  or  reduced,  the  premium  necessary  to 
meet  losses  will  be  reduced.  It  is  because  the 
public  is  beginning  to  think  that  the  possibility  of 
such  reductions  exists,  and  because  they  think  they 
have  often  not  received  fair  treatment  from  private 
insurance,  that  they  are  agitating  the  subject  of 
state  insurance. 

On  this  subject  the  words  of  Mr.  Hotchkiss,  late 
Superintendent  of  Insurance  in  New  York,  can  be 
quoted  with  approval.  "What  is  needed  by  our 
people  is  not  submergence  of  this  great  institution 
in  sovereignty,  but  the  proper  coordination  of 
insurance  and  government.  Each  should  do  for 
the  other  only  what  each  can  do  better  than  the 
other.  In  some  things  —  underwriting  and  adjust- 
[152] 


STATE  FIRE  INSURANCE 

ment,  for  instance  —  insurance  by  private  corpora- 
tions has  been  eminently  successful.  These  the 
state  should,  save  for  helpful  supervision,  let  alone. 
But  where  corporate  initiative  has  failed,  the  state 
should  coordinate  with  its  creatures.  In  some 
fields  competitive  practices  prevent  rate  making 
that  is  level  with  economic  cost.  The  temptation 
to  withhold  too  much  for  salary  or  overhead 
charge,  or  to  pay  too  much  —  ofter  far  too  much 
—  for  business,  is  ever  present.  Hence  home 
office  disbursements,  generally,  and  commission 
payments  are,  in  some  quarters,  higher  than  can 
be  justified  by  the  service  performed.  As  results, 
so-called  gentlemen's  agreements  to  maintain 
rates  thus  swollen  are  branded  as  trusts,  and, 
despite  their  existence,  rate  wars  are  waged 
which  profit  the  few,  but  postpone  that  adjust- 
ment of  premium  charge  to  economic  cost  which 
is  essential  to  public  satisfaction. 

"  While  leaving  to  its  insurance  corporations  all 
technical  and  specialized  functions  and  making  no 
effort,  save  through  proper  watchfulness,  to  inter- 
fere with  these  factors  in  the  rate  charged,  will 
not  the  state  in  the  not  distant  future  coordinate 
with  corporate  insurance  and  regulate  or  limit 
expenses  of  all  kinds  ?  If  it  does  not,  the  present 
[1531 


INSURANCE  AND  THE  STATE 

drift  toward  state  insurance  seems  likely  to  con- 
tinue. For,  whatever  be  the  field,  the  people  will 
not  long  pay  for  the  insurance  of  the  future  more 
than  such  service  is  rightly  worth." 


[154] 


m 

SOCIAL  INSURANCE 


CHAPTER  VI 

THE    NATURE    OF    SOCIAL    INSURANCE 

THE  subject  of  Life  and  Fire  Insurance  has 
been  considered  with  respect  to  the  desir- 
ability of  making  of  them  a  state  monopoly,  and 
there  remains  for  discussion  the  subject  of  social 
insurance.  In  considering  the  several  kinds  of 
Social  Insurance  it  will  be  necessary  to  base  the 
discussion  on  the  more  general  aspects  and  effects 
of  such  insurance  rather  than  upon  a  detailed 
examination  of  its  actual  accomplishments.  This 
is  necessary  because  it  is  a  newer  application  of 
the  insurance  principle,  and  no  such  scientific 
accuracy  is  to  be  found  as  in  the  longer  established 
forms  of  life  and  fire  insurance.  Then,  too,  the 
various  forms  of  social  insurance  are  receiving 
great  extensions  from  time  to  time,  which  causes 
readjustment  of  the  basis  upon  which  they  are 
established.  For  example,  a  liability  law  may  be 
replaced  by  a  compensation  law :  an  old  age  pen- 
sion law  may  be  changed  to  begin  at  age  55  in 
the  place  of  age  65. 

[157] 


INSURANCE  AND  THE  STATE 

The  term  "  Social  Insurance  "  in  its  widest  sense 
includes  all  those  applications  of  the  insurance 
principle  which  protect  the  social  organism  against 
all  the  risks  to  which  it  is  exposed.  It  is  usually 
applied  in  a  more  restricted  sense  to  include  only 
those  forms  of  insurance  which  protect  the  wage- 
earning  class.  In  this  discussion  it  will  be  under- 
stood to  include  Industrial  Accident  Insurance, 
Old  Age  and  Invalidity  Insurance,  and  Unemploy- 
ment Insurance.  The  benefits  resulting  from  an 
application  of  the  insurance  principle  have  been 
to  a  large  extent  limited  to  the  property-owning 
class.  This  has  been  due  chiefly  to  the  fact  that 
the  applications  of  the  insurance  principle  which 
in  the  past  have  been  worked  out  have  called,  at 
least  in  the  most  scientific  plans  of  its  applications, 
for  periodic  payments  of  stated  sums.  The  great 
masses  of  people,  either  because  of  lack  of  thrift 
or  for  reasons  over  which  they  have  little  or  no 
control,  have  not  had  the  sums  to  make  the  pay- 
ments. They  have,  therefore,  been  forced  either 
to  depend  upon  such  impracticable  plans  as  as- 
sessments insurance,  whose  results  have  been  dis- 
appointing, or  to  such  expensive  plans  as  private 
industrial  insurance,  whose  cost  has  been  so  high 
that  the  insured  received  but  a  small  part  of  the 
[158] 


THE   NATURE  OF  SOCIAL  INSURANCE 

benefits  which  the  total  payments  would  have 
purchased  if  the  expense  of  operating  the  business 
had  not  been  so  great.  Assessment  Insurance  by 
its  small  collections  did  afford  a  relief  to  many,  but 
history  does  not  afford  an  example  of  any  such 
society  that  has  been  able  to  continue  as  a  suc- 
cessful organization.  All  have  had  to  disappoint 
their  members  in  the  end.  The  numerous  five  and 
ten  cent  collections  of  industrial  insurance  have 
afforded  a  burial  fund,  but  the  expense  of  making 
these  collections  has  been  so  great  that  the  amounts 
left  for  policyholders  made  a  pathetic  commentary 
on  the  poverty  of  the  poor. 

The  name,  Social  Insurance,  is  indicative  of 
the  purpose  of  such  insurance  and  distinguishes  it 
from  other  forms  of  insurance  in  which  the  private 
or  personal  interest  predominates,  in  the  think- 
ing of  the  people,  over  the  social  interest.  That 
such  a  term  has  come  into  general  use  implies  that 
there  has  been  a  great  development  in  the  feeling 
of  human  solidarity.  The  community  is  begin- 
ning to  realize  that  the  burdens  of  a  particular 
class  should  be  borne  by  the  collective  strength 
of  the  community.  The  idea  that  the  strong 
should  assist  in  bearing  the  burdens  of  the  weak 
is  not  only  a  result  of  the  growth  of  humanitarian 


INSURANCE  AND  THE  STATE 

thinking,  but  it  is  also  a  result  of  more  correct 
thinking  upon  the  problem  of  what  constitutes  a 
strong  nation  and  an  efficient  industrial  com- 
munity, llthas  come  to  be  realized  that  in  order 
to  advance  the  prosperity  of  a  nation,  it  is  neces- 
sary to  conserve  its  productive  powers  by  some 
system  of  relieving  the  misfortunes  of  the  deserv- 
ing individual. )  What  becomes  to  the  individual 
a  crushing  burden  is  borne  lightly  by  the  whole 
community  under  a  system  of  insurance.  The 
underlying  basis  of  social  insurance  is  then  neither 
charitable  nor  individualistic.  1  The  more  for- 
tunate economic  classes,  however  philanthropi- 
cally  minded  they  may  be,  are  not  called  upon, 
under  a  system  of  social  insurance,  to  relieve  an 
individual  of  his  misfortune,  but  rather  to  pay  the 
just  share  of  what  is  rightly  their  costs,  both  as  a 
consumer  of  goods  and  as  members  of  the  social 
group  which  must  live  with  and  among  all  other 
members.  Therefore  these  more  fortunate  eco- 
nomic classes  must  be  as  social  beings  interested 
in  whatever  benefits  other  members  of  the  group. 
Nor  is  the  aid  given  to  the  individual  as  such. 
It  is  not  granted  on  personal  grounds.  It  is  given 
because  he  is  a  member  of  the  social  community 
whose  interests  are  to  secure  the  efficiency  in  a 
[160] 


social  sense  of  every  one  of  its  members.  Any 
element  in  the  plan  of  social  insurance  which  has 
a  pauperizing  effect  upon  the  recipients  is  to  be 
carefully  avoided.  Society  has  already  paid  too 
great  a  penalty  for  ill-devised  plans  of  relief. 
The  idea  of  social  insurance  is  not  to  relieve  in- 
dividuals from  the  personal  necessity  of  providing 
for  the  ordinary  demands  of  life.  His  food,  his 
clothing,  his  home,  and  his  family  must  have  his 
individual  care,  and  there  remains  this  adequate 
stimulus  for  thrift  in  providing  for  his  ordinary 
wants.  It  is  only  for  exceptional  demands,  as  in 
case  of  accident,  sickness,  old  age,  and  unemploy- 
ment, that  society  is  to  be  called  upon  to  assist 
in  a  collective  manner  the  individual  to  provide 
for  his  needs.  Security  from  these  exceptional 
risks  will  enable  better  provisions  to  be  made  for 
the  ordinary  demands  upon  the  individual,  and 
the  stimulus  of  saving  for  these  purposes  will  be 
preserved. 

If  such  is  the  general  character  of  Social  Insur- 
ance, then  the  relation  of  the  state  to  it  will  be 
somewhat  different  than  to  the  other  forms  of 
insurance  which  have  been  discussed.  That  is  to 
say,  if  the  term  "  social "  is  applicable,  it  cannot 
be  considered  a  business  from  which  profit  should 
M  [  161  ] 


INSURANCE  AND  THE  STATE 

be  derived  to  the  same  degree  as  is  true  in  the  case 
of  a  purely  private  business,  ^  What  is  a  social 
concern,  a  social  duty,  should  not  be  used  as  a 
source  of  private  revenue.  It  is  proposed,  then, 
to  examine  the  particular  character  of  the  various 
forms  of  social  insurance  with  the  view  of  deter- 
mining the  relation  of  the  state  to  such  forms  of 
insurance.  The  best  known  form  of  insurance  of 
this  character  is  Industrial  Insurance,  but  this 
term  for  our  purpose  does  not  refer  to  the  indus- 
trial insurance  sold  by  private  companies,  which 
was  chiefly  used  to  supply  a  burial  fund,  but  to 
industrial  accident  insurance  or  liability  insurance^ 
The  th^r^~underlying  liability  for  payment  to 
employees  by  employers  is  of  very  ancient  origin, 
but  industrial  conditions  have  changed  so  rapidly 
and  so  completely  that  circumstances  warranted 
a  much  more  rapid  change  in  the  theory  than  has 
actually  occurred. 

Before  discussing  each  of  these  methods,  it  is 
important  to  understand  how  the  evolution  of 
industrial  society  has  caused  the  need  of,  and  the 
demand  for,  insurance  for  the  wage  earners  to 
arise.  In  ancient  and  medieval  times  the  social 
and  industrial  organizations  precluded  the  exist- 
ence of  insurance  for  the  wage  earner.  Indeed, 
[162J 


THE  NATURE  OF  SOCIAL  INSURANCE 

there  was  no  such  class  of  wage  earners  as  we  now 
know  them.  During  the  existence  of  slavery  a 
large  part  of  the  work  was  done  by  this  class,  and 
as  the  slave  was  considered  a  species  of  property, 
nothing  was  owed  to  him  by  his  employer  or 
owner.  He  cared  for  him,  not  so  much  as  a  duty, 
but  because  it  was  to  his  economic  interest  to  do 
so.  The  comparatively  simple  industrial  life  of 
the  early  times  gave  little  value  to  the  life  of  an 
individual  as  such.  During  medieval  times  the 
feudal  system  prevailed,  and  the  masses  of  people, 
although  having  in  many  cases  comparatively  few 
rights,  enjoyed  protection  from  their  lords.  The 
hierarchal  form  of  social  organization  gave  a 
definite  status  to  each  member  of  the  social  group. 
Later,  when  the  trade  and  labor  classes  had  freed 
themselves  from  their  dependence,  guilds  and 
fraternities  arose.  One  of  the  most  important 
purposes  of  these  organizations  was  to  care  for 
their  members  in  times  of  sickness  and  for  the 
deceased  member's  family  in  case  of  death.  The 
first  classes  to  secure  independence  were  the  com- 
mercial and  trade  classes  of  the  free  cities,  and  as 
capital  developed  they  assumed  gradually  a  posi- 
tion of  greater  independence  and  importance. 
Capital  was  being  accumulated  from  the  ac- 
[163] 


INSURANCE  AND  THE   STATE 

tivities  of  the  trading  and  commercial  classes. 
The  discovery  of  gold  and  silver  in  the  new  world 
supplied  a  stock  of  metals  upon  which  a  money 
economy  could  be  established.  The  age  of  dis- 
covery opened  up  new  lands  for  exploitation  and 
brought  into  existence  new  commodities  and  new 
markets.  The  whole  industrial  world  was  on  the 
eve  of  a  revolution  as  a  result  of  the  accumulated 
capital,  the  stock  of  metals,  and  the  new  markets. 
This  so-called  industrial  revolution  is  usually  said 
to  date  from  1785  to  1825,  but  this  period  marks 
only  the  dates  between  which  the  transfer  to  a 
new  industrial  system  was  most  rapid  in  England. 
The  changes  were  so  very  marked  that  the  word 
"revolution"  may  be  applied  to  this  period  in 
England,  but  in  other  European  countries  and  in 
the  United  States  no  such  rapid  changes  occurred. 
It  will  be  more  accurate  to  call  the  change  an 
evolution  rather  than  a  revolution  and  fix  the  dates 
to  include  the  seventeenth,  eighteenth,  and  the 
first  half  of  the  nineteenth  centuries,  because 
during  this  period  the  capitalistic  system  was  fully 
established  in  the  European  and  American  coun- 
tries. The  feudal  system  had  disappeared,  the 
household  or  domestic  system  arose  which  the 
previous  accumulation  of  capital  made  possible 
[164] 


THE  NATURE  OF  SOCIAL  INSURANCE 

and  the  new  markets  made  desirable.  But  the 
most  important  for  our  purpose,  the  status  of  the 
laborer  was  radically  changed. 

The  laborer  lost  his  tool  and  gained  the  machine, 
which,  on  account  of  its  high  cost,  was  beyond  the 
powers  of  his  private  possession.  He  lost  his 
personal  master,  and  gained  the  impersonal  cor- 
poration. The  conditions  of  labor  were  now  to  be 
determined,  not  by  two  persons,  the  laborer  and 
his  master,  but  by  one  person  and  a  thing.  The 
laborer  gave  up  the  workshop  of  the  home  and 
went  into  the  factory.  He  worked  for  a  money 
wage  under  a  wage  contract.  He  was  no  longer 
a  capitalist  and  a  laborer,  but  simply  a  laborer 
selling  his  only  possession  —  time.  In  the  un- 
precedented demand  for  goods  it  is  not  surprising 
that  the  capitalistic  class  were  often  unmindful  of 
the  duties  which  they  owed  to  the  laborer  as  a  man. 

We  need  not  rehearse  how  the  humanitarian 
ideas  slowly  developed  and  how  they  gradually 
became  expressed  in  various  measures  designed 
to  protect  the  wage-earning  class ;  nor  what  ef- 
forts were  made  by  the  wage  earners  themselves, 
through  the  formation  of  friendly  societies  and 
trade-unions,  to  protect  themselves  ;  nor  how  there 
came  to  be  a  labor  question  and  why  the  neglect 
[1651 


INSURANCE  AND  THE  STATE 

of  the  labor  class  during  this  period  of  the  indus- 
trial evolution  has  caused  the  problem  to  become 
so  acute  in  the  present ;  nor  how  England,  because 
she  was  the  farthest  developed  industrially,  began 
to  enact  laws  for  the  protection  of  the  labor  class 
early  in  the  nineteenth  century  and  how  other 
nations  have  followed  her  example.  For  our 
purpose  it  is  sufficient  to  understand  that  the 
character  of  the  industrial  organization  of  the 
present  demands  institutions  designed  particu- 
larly for  the  industrial  classes. 

The  relation  of  laborers  to  the  employers  in 
ancient  and  medieval  times  was  quite  different 
from  what  it  has  come  to  be  in  modern  industrial 
times.  The  factory  system  was  not  in  existence, 
and  the  bond  of  relation  between  the  laborer  and 
the  employer  was  closer.  The  personal  relation 
was  more  definite.  In  most  cases  the  number  of 
employees  of  one  person  was  limited.  The_lahoj- 
ers  worked  for  a  person,  not-  for  a  corporation. 
Out  of  this  relationship  of  early  times  there  grew 
UP  a  comrprm-law  prinq'plp  of  liability  of  the  em- 
ployer to  his  employees,  which,  although  it  did 
not  secure  full  protection  to  the  laborers,  yet  was 
thought  sufficient  until  late  in  the  nineteenth  cen- 
tury, when  the  common-law  principle  became  ex- 
[166] 


THE  NATURE  OF  SOCIAL  INSURANCE 

pressed  in  statute  law.  No  greater  proof  of  the 
helplessness  or  disadvantage  at  which  the  laborer 
bargains  with  the  capitalist  for  his  wage  is  to  be 
found  than  in  the  fact  that  it  was  over  a  century 
after  the  establishment  of  the  factory  system  be- 
fore an  employer's  liability  law  was  enacted. 
Dependence  was  placed  in  the  operation  of  the 
common-law  principle  which  had  grown  up  from 
very  early  times. 

We  naturally  look  for  the  most  definite  expres- 
sion of  this  principle  in  Roman  law.  We  find 
that  the  master  under  this  law  was  not  only  re- 
sponsible to  the  servant  for  any  injury  suffered  by 
the  latter  when  not  due  to  the  employee's  care- 
lessness, but  the  master  was  also  subject  to  lia- 
bility for  an  injury  suffered  by  a  third  party  as  a 
result  of  the  actions  of  the  servant  when  in  the 
employment  of  the  master.  It  is  important  to 
understand,  however,  that  as \_the  principle  of 
liability  developed  under  Roman  and  later  under 
English  law  the  liability  did  not  rest  upon  the 
master  in  the  following  casesj^  first,  if  the  person 
injured  was  a  fellow-servant.  This  is  known  as 
the  fellow-servant  doctrine.  Second,  if  the  em- 
ployee knew  or  had  means  of  knowing  the  dangers 
incident  to  the  employment  and  voluntarily 
[167] 


INSURANCE  AND  THE  STATE 

accepted  the  employment.  This  is  known  .as  the 
assumed  risk  doctrine.  Third,  if  the  injury  re- 
sulted from  the  combined  negligence  of  employer 
and  employee,  that  is,  the  latter  contributed  to 
the  negligence  which  resulted  in  his  injury.  This 
is  known  as  the  contributory  negligence  doctrine. 

It  is  important  to  understand  these  limitations 
or  exceptions,  because  practically  all  the  legislation 
and  all  the  court  decisions  since  this  far-distant 
date,  so  far  as  they  have  given  greater  protection 
to  the  employees,  have  done  so  by  modifying  or 
doing  away  with  these  limitations.  This  is  the 
goal  from  which  we  have  started,  and  the  goal  to 
which  we  go  is  to  assess  upon  society  in  some 
manner  the  total  costs  of  production;  to  secure 
for  the  laborer,  not  only  an  adequate  daily  wage, 
but  also  protection  against  accident,  however 
caused,  against  sickness,  unemployment,  invalidity, 
and  old  age.  Not  until  then  will  many  agree  that 
an  equitable  system  of  distribution  has  been  de- 
vised, for  the  burden  now  resting  upon  the  shoul- 
ders of  the  laborer  is  not  all  his  own. 

Without  tracing  the  changes  in  the  conditions 

of  work  and  the  changes  which  occurred  in  the 

industrial  organization  after  the  establishment  of 

the  factory  system,  it  may  at  once  be  stated  that 

[1681 


THE  NATURE  OF  SOCIAL  INSURANCE 

as  a  result  of  these  changes  England  passed  an 
employer's  liability  law  in  1880.  England  was 
the  most  advanced  industrial  nation,  and  this 
fact,  together  with  the  character  of  its  people  and 
government,  accounts  for  this  law.  The  most 
surprising  fact  about  the  law  is  that  its  enactment 
was  so  long  delayed  both  in  Europe  and  in 
America. 

In  the  United  States  the  development  of  the 
idea  of  the  obligation  on  society  to  bear  the  cost 
of  industrial  accidents  has  been  slow  in  gaining 
acceptance.  This  has  been  due  in  part  to  the 
character  of  the  industrial  life  and  in  part  to  the 
prevailing  individualistic  philosophy,  which  has 
very  naturally  received  expression  in  our  consti- 
tutions and  laws.  Industrially  the  country  has 
been  very  largely  agricultural,  and  the  opportunity 
for  free  enterprise  has  been  very  great.  There 
was  a  large  amount  of  free  land,  and  the  worker 
had  a  choice  of  occupations.  But  as  cities  began 
to  grow  into  great  industrial  centers,  with  all  the 
concomitant  problems  of  the  factory  system,  a 
relationship  of  employer  and  employee  arose,  for 
which  the  old  individualistic  philosophy  did  not 
provide.  Industrial  accidents  became  numerous, 
and  yet  the  right  of  free  contract,  the  rights  of 
[169] 


INSURANCE  AND  THE  STATE 

private  property,  and  other  guarantees  of  the  in- 
dividualistic philosophy  embodied  in  constitu- 
tions and  laws,  prevented  a  just  assumption  of 
what  was  a  social  burden.  To  state  that  wage 
earners  are  receiving  a  higher  wage  than  formerly 
is  not  pertinent  to  the  question,  any  more  than  to 
state  that  they  are  thriftless.  Even  if  these 
statements  are  true,  the  question  is,  have  wage 
earners  shared  equitably  in  the  increased  progress 
of  the  century,  and  are  sufficient  opportunities 
and  inducements  present  to  make  them  provident  ? 
The  heavy  burdens  which  they  have  borne  as  a 
result  of  accidents  in  their  employment  have 
resulted  not  simply  because  they  were  working  for 
a  wage  for  themselves,  but  also  because  they  were 
producing  commodities  for  society.  In  the  second 
place  the  opportunity  to  own  land  or  homes  or 
the  tools  of  production  is  very  largely  absent,  and 
a  powerful  incentive  to  save  is  therefore  absent. 
Whenever  the  result  of  saving  can  express  itself  in 
a  tangible  form,  the  inducement  to  save,  especially 
to  the  less  well  educated,  is  very  strong.  The  in- 
definite need  for  an  old  age  which  many  may 
never  experience,  and  which  is  far  distant  for  all, 
the  opportunity  for  an  advanced  education  whose 
benefits  are  generally  unknown  because  experi- 
[170] 


THE  NATURE  OF  SOCIAL  INSURANCE 

enced  by  but  few,  the  opportunity  for  leisure, 
which  they  do  not  know  how  to  use  because  of  the 
necessity  of  daily  and  continuous  labor,  these, 
and  many  other  causes,  have  all  been  responsible 
for  the  absence  of  thrift  among  the  laboring  class, 
and  have  prevented  them  from  adequately  sharing 
in  the  wonderful  progress  of  the  past  century. 

There  is,  however,  evidence  of  a  great  awakening 
among  the  people  of  the  United  States  in  regard 
to  their  duties  to  the  wage-earning  population. 
This  is  due  in  part  to  the  great  development  of 
humanitarian  thinking,  and  in  part  due  to  the 
gradual  growth  of  class  consciousness  among  wage 
earners,  which  has  expressed  itself  in  unified  de- 
mands upon  the  public  to  be  relieved  of  some  of 
the  burdens  of  society  which  the  laborers  have 
been  carrying.  For  our  purpose  this  demand 
has  taken  the  form  of  an  insistence  that  the  old 
theory  of  employer's  liability  should  be  changed 
to  meet  the  changed  industrial  conditions.  There 
is  but  little  justification  under  our  present  indus- 
trial organization  for  an  insistence  upon  the  old 
doctrines  of  assumed  risk,  fellow-servant,  or  con- 
tributory negligence,  however  deeply  imbedded 
they  are  in  laws  and  court  decisions.  In  some 
states  these  doctrines  have  practically  been  abol- 
[1711 


INSURANCE  AND  THE  STATE 

ished,  and  hence  arises  the  need  of  distinguishing 
between  the  Employer's  Liability  principle  and 
the  Compensation  principle. 

The  first  principle  has  to  do  with  the  circum- 
stances under  which  an  employee  could  receive 
damages  from  his  employer  because  the  employer 
was  made  by  law  responsible  for  injuries  received. 
This  was,  as  has  been  shown,  based  upon  the  in- 
dividualistic philosophy  of  the  rights  of  property, 
of  free  competition,  and  contract.  The  second 
principle  has  to  do  with  the  compensation  given 
either  directly  by  the  state  or  enforced  by  a  law 
upon  the  employer  to  grant  compensation  for  all 
injuries  received  while  engaged  in  the  services  of  an 
employer.  It  is  true  that  the  second  principle 
may  exclude  certain  industries,  as,  for  example, 
agriculture  or  employers  of  a  limited  number  of 
workmen,  but  the  idea  underlying  the  principle 
is  to  recognize  that  the  large  per  cent  of  injuries 
received  in  industrial  employment  are  not  pri- 
marily due  to  the  fault  of  the  worker ;  that  they 
are  a  just  part  of  the  costs  of  production,  and 
society  which  uses  the  product  should  pay  all  its 
costs  of  production.  If  a  workman  in  walking 
across  a  perfectly  smooth  factory  floor  should 
stumble  and  fall  into  a  machine  and  as  a  result 
[172] 


THE  NATURE  OF  SOCIAL  INSURANCE 

be  under  the  necessity  of  having  an  arm  amputated, 
he  might  not  under  a  liability  principle  receive 
any  damages  from  his  employer,  but  under  the 
compensation  principle  he  would  be  indemnified 
on  the  ground  that  such  accidents  are  possible 
to  a  workman,  and  that  the  loss  should  fall  neither 
upon  the  employee  nor  the  employer,  but  upon  so- 
ciety for  whom  the  product  was  being  produced. 
The  compensation  principle  is  thus  more  inclusive 
than  the  liability  principle,  and  its  general  adop- 
tion is  probably  only  a  question  of  a  few  years  in 
those  civilized  countries  where  it  is  now  partly 
in  force. 


173] 


CHAPTER  VII 

SHOULD  THE  STATE  MONOPOLIZE 
SOCIAL  INSURANCE? 


chief  subject  of  the  investigation  is  thus 
1  reached  in  the  question,  what  instrumental- 
ity should  be  used  to  apply  this  principle  ?  Should 
it  be  the  state  or  private  companies  under  the 
supervision  of  the  state  ?  It  is  well,  in  attempting 
an  answer  to  this  question,  to  investigate  briefly 
the  means  which  have  been  used  to  secure  pro- 
tection to  the  working  classes  from  industrial 
accidents  and  sickness.  One  of  the  earliest  meth- 
ods of  securing  this  protection,  and  one  that  has 
continued  to  the  present  time,  is  that  whereby 
the  employees  formed  among  themselves  purely 
mutual  associations.  When  an  accident  or  any 
other  misfortune  occurred,  payments  were  made 
or  aid  rendered  to  the  suffering  worker  by  his  as- 
sociates. These  mutual  associations  have  been 
formed  for  various  purposes  and  on  various  bases. 
Sometimes  a  stated  sum  without  reference  to  the 
[174] 


STATE  SOCIAL  INSURANCE 

wage  received  was  paid  by  eaeh.  Out  of  this,  cer- 
tain sums  were  paid  during  sickness  or  upon  death. 
In  other  cases  the  collections  and  payments 
were  adjusted  to  the  wage  received.  Whatever 
the  basis,  the  characteristic  of  all  these  asso- 
ciations was  their  mutuality.  It  was  a  volun- 
tary association  of  workers  usually  employed  in 
the  same  industry.  They  were  not  formed  in 
response  to  any  liability  Taw  of  the  state,  but  were 
simple  expressions  of  the  recognition  on  ttie  part 
of  the  wage  earners  of  their  class  interests.  As  a 
class  they  suffered  certain  misfortunes  as  a  result 
of  their  employment,  and  they  took  this  means  of 
aiding  each  other.  These  societies  exist  in  large 
numbers  at  present,  and  any  plan  of  social  insur- 
ance which  does  not  take  their  existence  into 
consideration  and  offer  encouragement  to  their 
continuance  and  their  improvement  to  a  more 
scientific  basis  is  likely  to  do  a  great  social  injury. 
These  voluntary  organizations  would  form,  be- 
cause they  are  voluntary  and  not  compulsory,  a 
means  by  which  great  social  and  industrial  effi- 
ciency can  be  secured  for  this  class  of  the  popu- 
lation. They  exist  as  a  nucleus  around  which  may 
gather  many  forces  for  growth.  The  state  is  a 
mysterious  force  for  good  only  in  so  far  as  it  works 
[175J 


INSURANCE  AND  THE  STATE 

through  the  people  who  compose  it,  and  social 
improvement  cannot  result  from  merely  passing 
compulsory  laws  and  attaching  penalties  for  their 
disobedience,  but  rather  by  offering  stimulus  to 
desirable  voluntary  forces  and  organizations  which 
spring  out  of  the  life  and  the  experience  of  its 
citizens.' 

As  the  principle  of  liability  of  the  employer  to 
the  worker  became  extended  and  better  expressed 
in  laws,  private  insurance  organizations  were 
formed  which  sold  to  the  employer  protection 
against  claims  made  by  the  worker  under  the  lia- 
bility laws.  This  may  be  called  public  voluntary 
liability  insurance.  T^hat  is  to  state,  the  law  estab- 
lished the  liability,  and  the  employer  voluntarily 
purchased  the  protection  of  a  private  company 
which  was  formed  to  protect  him  against  any 
suits  which  were  entered  by  the  workman  for  dam- 
ages as  a  result  of  an  industrial  accident.  These 
private  companies  established  their  charge  or 
premium  on  the  basis  of  the  risks  of  the  industry 
and  the  accidents  in  the  particular  plant.  That 
is  to  state,  the  number  of  accidents  in  the  industry 
and  in  the  particular  plant  of  the  employer  were 
the  fundamental  factors  which  determined  the 
cost  of  the  insurance  or  protection  from  damage 
[176] 


STATE  SOCIAL  INSURANCE 

suits  for  the  particular  employer.  When  a  suit 
was  entered  by  the  workman,  it  was  a  matter  of 
concern  for  the  insurance  company  and  not  for 
the  employer.  The  latter  simply  reported  the 
facts  to  the  insurance  company,  which  either 
effected  a  settlement  with  the  injured  workman 
before  a  suit  for  damages  was  instituted  and  tried, 
or  defended  the  case  before  the  court  and  paid 
whatever  damages  were  granted.  This  method 
of  assuming  liability  under  the  law  has  come  into 
very  general  use  during  the  past  thirty  years.  It 
has  adaptability  from  the  viewpoint  of  both  em- 
ployers and  the  insurance  companies  to  any  type 
of  a  liability  or  even  a  compensation  law.  The 
extent  to  which  it  has  been  satisfactory  to  the 
workingmen  will  be  discussed  later. 

In  addition  to  the  above  methods  of  securing 
protection  to  the  working  class  another  method 
has  been  developed  of  late  years.  This  is  the 
Relief  Association,  as  exemplified  in  the  associa- 
tions of  a  number  of  important  railway  companies 
and  large  industrial  organizations,  such  as  the 
United  States  Steel  Company  and  the  Interna- 
tional Harvester  Company.  These  Relief  Asso- 
ciations differ  somewhat  in  the  particulars  of 
, their  organization  and  operation,  but  the  purpose 
N  [177] 


INSURANCE  AND  THE  STATE 

is  largely  the  same.  Not  only  is  the  worker 
granted  aid  in  time  of  sickness  and  accident,  but 
usually  a  pension  is  paid  after  a  certain  age,  or 
in  case  of  total  disability,  or  to  his  family  in  case 
of  death.  !  The  employee  usually  shares  with  the 
employer  tEe  cost  of  the  service,  although  the  latter 
may  pay  a  large  part  or  all  of  it  in  a  few  casesT1 

^     •    J 

Membership  in  the  association  is  voluntary  for 
the  employee.  The  relief  is  adjusted  to  the  wage 
received,  and  the  systems  in  practically  all  cases 
have  been  carefully  devised  and  operated. 

Before  passing  to  a  consideration  of  the  com- 
pensation principle  it  is  well  to  note  that  the  vol- 
untary principle  has  been  very  largely  the  rule 
until  the  past  several  years.  That  is  to  state,  the 
employer  and  the  employee  were  permitted  to  take 
whatever  means  they  chose  to  protect  themselves 
against  industrial  sickness  and  accidents.  The 
employees  might  ally  themselves  in  mutual  or- 
ganizations; the  employers  could  buy  their  lia- 
bility protection  from  a  private  company  selling 
such  protection.  Even  when  it  was  found  that 
a  considerable  number  of  accidents  was  due  to 
the  nature  of  the  industry  itself  and  the  demand 
arose  that  the  industry,  that  is,  the  employer, 
be  made  liable  for  them,  there  was  no  attempt  to 
[1781 


STATE  SOCIAL  INSURANCE 

dictate  the  manner  in  which  this  liability  should 
be  met.  In  other  words  the  employer's  liability 
principle  as  a  legal  principle  had  reached  its 
limit.  It  was  soon  found,  however,  from  practical 
results,  that  the  condition  of  the  employee  had 
been  but  little  improved.  Liability  in  law  had 
been  established.  The  legal  problem  had  been 
solved,  but  the  social  problem  remained.  The 
workman,  it  was  found,  could  receive  damages 
at  law  only  after  long  delays  and  heavy  expenses, 
which  often  absorbed  a  great  part  of  the  damages 
which  were  awarded.  Suits  were  contested,  and 
too  often  the  success  in  resisting  claims  measured 
the  excellence  of  the  insurance  company  from  the 
standpoint  of  the  employer.  At  the  close  of  1911 
the  statistics  of  the  Liability  Companies  reporting 
to  the  Massachusetts  Department  of  Insurance 
showed  that  these  companies  had  outstanding 
14,227  suits. 

For  each  of  the  preceding  five  years  the  suits 
unsettled  for  the  year  were  as  follows :  3394  suits 
unsettled  for  the  year  1911;  5559  suits  for  1910 
unsettled;  2684  suits  for  1909  unsettled;  1206 
suits  from  1908  unsettled ;  and  618  suits  from 
1907  unsettled.  It  is  true  that  neither  the  total 
number  of  suits  unsettled  nor  the  suits  of  any  one 
[1791 


INSURANCE  AND  THE  STATE 

year  are  a  large  percentage  of  the  total  claims 
paid  or  the  total  claims  in  force  for  the  year.  But 
it  is  not  in  this  fact  that  the  chief  significance  lies. 
The  real  importance  consists  in  this  fact:"  that 
many  workmen  were  injured  and  the  indemnity 
belonging  to  them  from  some  one  was  being  with- 
held. They  and  their  families  needed  to  be  sup- 
ported in  some  manner  from  some  source.  Not 
the  number  of  workmen  injured  in  an  industry 
has  been  the  real  measure  of  charges  to  the  em- 
ployer by  the  insurance  company,  but  the  amount 
of  the  claims  which  they  were  forced  to  pay  con- 
stituted essentially  the  determinant  of  the  pre- 
mium. In  a  system,  then,  under  which  both  the 
company  and  the  employer  had  an  advantage  to 
gain  from  preventing  the  employee  from  securing 
indemnity,  the  results  secured  for  the  working- 
man  were  not  large.  Investigations  made  with 
some  considerable  care  seem  to  warrant  the  state- 
ment that  the  workman  has  secured  actually 
less  than  one  third  of  the  indemnity  granted  by 
the  courts.  What  per  cent  he  has  secured  of 
what  he  really  should  have  secured  as  the  result 
of  an  injury  suffered  through  no  fault  of  his  own 
is  certainly  much  less.  Even  under  the  best 
liability  laws  many  injured  workmen  have  either 
U801 


STATE  SOCIAL  INSURANCE 

received  nothing  or  have  been  persuaded  to  ac- 
cept pathetically  small  amounts,  or  if  the  court 
has  awarded  damages,  a  large  part  of  it  has  been 
taken  to  pay  the  costs  of  prosecuting  the  claim. 

It  is  not  then  surprising  that  a  demand  arose 
to  replace  the  indefinite  liability  laws  under  which 
the  intended  beneficiary  —  the  workman  —  re- 
ceived so  little,  with  a  definite  compensation  law 
under  which  specific  sums  were  to  be  paid  upon 
the  happening  of  certain  industrial  accidents. 
Such  laws,  by  specifying  the  indemnity  to  be  paid, 
avoid  the  necessity  of  numerous  trials  at  law  to 
fix  either  the  responsibility  for  the  injury  or  the 
amount  to  be  paid.  This  introduces  necessarily 
the  system  of  compulsory  insurance,  but  it  does 
not  follow  that  there  need  be  compulsory  organi- 
zation. That  is  to  state,  the  compensation  may 
be  established  by  law  in  great  detail,  and  yet  the 
employer  might  be  left  to  make  whatever  arrange- 
ment he  chose  to  meet  the  costs  of  paying  the 
compensation. 

That  the  insurance  should  be  compulsory,  how- 
ever provided  for,  rests  chiefly  upon  two  points. 
First,  the  experience  of  the  past  seems  to  show 
that  thl£  workingman  has  not  been  able  to  se- 
cure protection  against  risks  which  were  under- 
[181] 


INSURANCE  AND  THE  STATE 

taken  in  the  production  of  goods  for  society. 
Second,  for  whatever  reasons,  the  facts  show  that 
he  has  not  provided  a  fund  from  his  earnings  to 
care  for  himself  and  his  family  during  the  time 
that  he  has  suffered  from  these  accidents.  Society 
therefore  finds  a  large  number  of  its  members  de- 
pendant upon  it  for  certain  periods,  during  which 
times  they  are  either  insufficiently  cared  for  or  are 
the  subjects  of  forms  of  relief  which  in  neither  case 
tend  to  increase  their  social  and  industrial  ef- 
ficiency. Wage  earners  have  neither  the  prudence 
nor  the  income  to  provide  such  insurance,  nor  have 
they  the  power  to  enforce  employers  to  pay  for  it 
in  the  form  of  a  higher  wage.  The  insurance  pro- 
vided in  compensation  laws  is  therefore  so  thor- 
oughly social  and  the  practical  results  under  a 
voluntary  system  of  liability  insurance  have  been 
so  disappointing,  that  both  on  grounds  of  theory 
and  practice  it  should  be  compulsory.  The  move- 
ment for  compulsory  insurance  of  this  character 
has  been  realized  in  many  European  countries 
and  is  being  adopted  in  the  states  of  this  country. 
The  important  questions  thus  are,  should  this 
form  of  insurance  be  made  not  only  compulsory, 
but  should  it  also  be  made  the  subject  of  a  state 
monopoly  ? 

[182] 


STATE  SOCIAL  INSURANCE 

Most  of  the  important  European  countries  have 
made  this  form  of  insurance  compulsory,  and  it 
would  seem  that  the  character  of  the  insurance 
and  the  class  to  which  it  refers  make  compulsion 
the  only  possible  working  basis.  The  object  of 
such  insurance  is  to  bring  its  benefits  to  those 
who  need  it  most,  but  so  long  as  it  is  voluntary 
the  class  which  needs  it  most  is  not  likely  to 
secure  it.  It  is  true  that  certain  classes,  such  as 
the  paupers,  the  physically  and  mentally  deficient, 
cannot  be  reached  by  such  insurance,  but  the 
problem  arising  in  connection  with  them  is  for 
philanthropy,  for  industrial  education,  and  eu- 
genics. The  compulsion  in  the  case  of  social 
insurance  of  this  kind  is  merely  to  secure  a  form 
of  social  cooperation  and  cannot  be  considered 
an  odious  exercise  of  sovereignty.  The  wage 
earners  have  not  protected  themselves  against 
the  industrial  risks!  This  may  have  been  due  to 
lack  of  means,  ability  to  save,  foresight,  or  a 
number  of  other  causes,  and  only  a  plan  of  com- 
pulsion seems  adequate  for  the  work  to  be  done. 

If  the  state  establishes  a  monopoly,  it  must  be 
either  to  secure  adequate  regulation  or  for  social- 
developmental  purposes,  and  not  with  the  hope  of 
securing  from  such  a  monopoly  any  financial 
[183] 


INSURANCE  AND  THE  STATE 

return.  Little  justification  could  be  found  in  the 
principles  of  state  financiering  for  using  this  in- 
surance as  a  source  of  revenue  for  the  state.  The 
\  "N  wage  earners  as  a  class  have  little  property  to  bear 
a  tax,  and  their  wages  are  far  removed  from  that 
point  which  is  supposed  to  justify  a  tax.  The 
employer  who  directly  pays  the  premium  neces- 
sary to  purchase  this  industrial  insurance  should 
not  be  required  to  pay  more  than  the  cost  of  the 
service,  since  a  good  system  of  taxation  will  levy 
a  tax  upon  all  his  property.  The  accidents  which 
occur  in  his  plant  are  incurred  in  producing  goods 
for  social  consumption,  and  his  outlay  should  be 
limited  to  the  costs  of  the  materials  and  labor. 
Society  could  have  nothing  to  gain  by  charging 
itself  more  than  the  full  cost  of  making  the  indus- 
trial goods  and  thus  use  this  insurance  as  a  source 
of  profit.  Therefore  no  one  of  the  three  possible 
sources  of  a  revenue  can  be  used  to  make  a  profit 
for  the  state  under  a  monopoly  of  this  insurance. 
The  wage  earner  whom  the  insurance  is  primarily 
intended  to  benefit  cannot  be  used  as  a  source 
of  profit  if  a  system  should  be  desired  of  making 
him  pay  its  costs ;  for  a  profit  of  this  character 
would  tend  to  defeat  the  very  purpose  of  the  in- 
surance. The  employer  should  not  be  used  as  a 
[1841 


source  of  profit  for  the  state  since  he  is  under  a 
just  system  of  taxation  already  contributing  his 
share  to  the  state's  revenue.  Lastly,  society  or 
the  consumers  of  the  product  should  not  be  used 
as  a  means  of  securing  a  profit,  for  this  would  be  but 
taking  money  out  of  one  pocket  and  placing  it  in 
another.  Consumers  should  pay  the  full  costs  of 
producing  the  product,  but  not  more  than  this. 
Other  more  direct  and  equitable  methods  of  secur- 
ing revenue  to  the  state  are  available. 

It  may  be  urged,  however,  that  it  is  for  purposes 
of  satisfactorily  regulating  the  business  that  a 
state  monopoly  is  desirable.  This  assumes  that 
the  results  desired  under  a  compensation  law  are 
difficult  to  secure  under  a  system  of  state  regula- 
tion of  private  insurance.  That  is  to  state,  that 
even  when  the  particular  compensation  is  fixed 
by  law,  the  results  to  the  wage  earner  are  not  so 
good  as  when  the  law  is  administered  and  operated 
by  the  state.  There  is,  in  fact,  no  lack  of  statute 
power  to  regulate  the  private  companies  which 
would  sell  insurance  under  a  compensation  law. 
A  state  is  supreme  in  the  matter  of  regulating 
insurance  transactions  within  the  state.  The 
particular  regulations  may  not  accomplish  their 
purpose,  but  this  is  not  due  to  a  lack  of  power  to 
[1851 


INSURANCE  AND  THE  STATE 

regulate,  but  either  to  a  lack  of  knowledge  of  how 
to  regulate  or  to  the  peculiar  character  of  the  sub- 
ject regulated.  Complaint  has  been  made  in 
some  states  where  compensation  laws  are  in  force 
that  the  private  companies  which  sold  the  insur- 
ance protection  increased  the  rates  as  compared 
with  those  in  other  states.  But  the  state  can 
regulate  the  rates  or  enforce  rates  of  its  own  mak- 
ing. It  is  not  because  of  any  lack  of  constitutional 
power  to  regulate  the  private  companies  that  a 
state  monopoly  should  be  urged,  but  rather  for 
a  number  of  other  reasons  which  now  demand 
consideration. 

It  is  argued  that  private  companies  have,  on  the 
basis  of  their  conduct  of  liability  insurance,  for- 
feited any  right  to  claim  that  they  can  furnish 
the  insurance  under  a  compensation  law  either 
economically  or  equitably.  The  expenses  of  op- 
erating such  companies  in  the  United  States  have 
been  shown  to  be  about  fifty  per  cent  of  the  re- 
ceipts, excluding  profits  to  stockhoI3ers,  while  in 
Germany,  where  the  state  largely  administers  the 
law,  such  expenses  are  as  low  as  14.1  per  cent  of 
the  receipts.  The  enormous  expenses  now  paid 
for  commission,  salaries,  and  advertising  would,  it 
is  claimed,  be  saved  under  a  state  monopoly. 

[186] 


STATE  SOCIAL  INSURANCE 

It  is  again  pointed  out  that  competition  often 
results  in  discrimination  in  rates.  The  large 
employer,  it  is  claimed,  has  always  been  able  to 
secure  more  favorable  rates  than  the  small  one 
after  all  fair  allowance  for  the  difference  in  writing 
and  operating  the  business  has  been  made.  It  is 
said  that  discrimination  often  occurs  between  the 
producers  in  different  states.  Rates  are  juggled 
to  meet  competition  at  one  place  or  another.  It 
is  said  dishonesty  is  prevalent  among  agents  in 
rating  risks,  and  that  this  is  countenanced  by  the 
officials  of  the  company  as  a  necessary  means  of 
getting  business  under  the  conditions  of  competi- 
tion. 

Again  it  is  pointed  out  that  the  private  com- 
panies have  never  succeeded  in  forming  associa- 
tions to  exchange  experience  from  which  really 
scientific  rates  could  be  made.  Readjustments 
of  rates  to  get  the  business  have  been  more  often 
the  rule  rather  than  rates  based  upon  actual  ex- 
perience of  losses. 

It  is  also  argued  that  under  the  private  system 
there  has  not  been  the  proper  inducement  given 
to  improve  the  working  condition  of  the  plant; 
that  is  to  say,  the  employer  has  had  little  induce- 
ment to  install  protective  devices  for  his  workmen 
[187] 


INSURANCE  AND  THE  STATE 

because  he  knew  that  if  the  liability  company  at- 
tempted to  raise  his  rates,  another  company  would 
write  his  business  either  at  the  old  rate  or  at  a 
lower  one.  It  is  also  urged  that  under  a  private 
system  the  compensation  principle  is  likely  not 
to  be  as  satisfactory,  owing  to  the  fact  that  the 
worker  will  be  forced  to  deal  with  his  employer 
and  a  stranger  whom  his  past  experience  has 
taught  him  to  believe  are  not  interested  in  secur- 
ing justice  for  him,  whereas  he  would  feel  that  the 
state  had  no  interests  other  than  justice  to  serve. 
The  private  companies  under  the  liability  principle 
certainly  have  not  earned  great  credit  to  them- 
selves either  for  the  economical  use  of  the  funds 
which  they  received  or  for  their  zeal  in  endeavor- 
ing to  see  that  the  injured  worker  secured  the 
indemnity.  Indeed  it  was  not  to  be  expected 
under  the  old  system  of  liability  that  the  insur- 
ance company  should  serve  the  workingmen. 
The  company  was  paid  a  price  to  relieve  the  em- 
ployer of  the  liability,  and  the  company  was  the 
servant  of  the  employer  to  protect  him  from  the 
workman.  The  company  could  not  at  the  same 
time  be  a  protector  to  the  employer  against  his 
workmen  and  a  preserver  of  the  interests  of  the 
workmen.  Whatever  the  theory  of  liability  in- 
[1881 


STATE  SOCIAL  INSURANCE 

surance  has  been,  in  its  actual  working,  the  private 
company  has  resisted  the  claims  of  the  wage 
earner  against  the  employer.  It  is  therefore 
claimed  that  the  interest  of  society  in  the  work- 
men can  be  best  served  under  such  a  state  mo- 
nopoly of  the  business. 

It  is  true  that  the  theory  of  compensation  laws 
is  that  the  costs  of  the  insurance  will  be  ultimately 
borne  by  the  consumers  of  the  product,  and  hence 
the  important  social  interest  of  having  a  minimum 
cost  in  transacting  the  insurance.  There  are,  how- 
ever, some  difficulties  in  a  complete  acceptance  of 
the  theory  that  the  consumer  will  in  every  case 
bear  all  the  costs  of  compensations  for  the  injured 
workman.  It  is  assumed  that  it  is  immaterial  to 
the  employer,  or  even  to  the  private  insurance 
company,  what  compensation  is  established,  since 
each  will  but  add  it  to  the  cost  of  producing  the 
commodity,  or  the  cost  of  the  insurance  and  then 
collect  it  from  the  consumer.  But  is  it  always 
possible  to  shift  completely  this  added  cost  ?  If 
a  uniform  compensation  law  for  the  whole 
country  was  adopted,  such  a  shifting  would  un- 
doubtedly be  more  possible.  It  may,  however, 
happen  that  this  increased  cost  of  production  may 
be  the  deciding  factor  in  the  competition  between 
[189] 


INSURANCE  AND  THE  STATE 

two  producers  in  different  states,  having  either 
different  compensation  laws,  or  where  one  has  a 
compensation  law  and  the  other  a  liability  law. 
The  cost  of  this  insurance,  which  may  be  con- 
sidered as  a  tax  in  discussing  its  incidence,  is  as- 
sumed to  be  a  tax  on  consumption,  and  like  all 
such  taxes  of  this  character  its  final  incidence  is 
difficult  to  determine.  It  has  been  pointed  out 
that  while  a  tax  or  charge  of  this  character  can 
be  added  to  the  price  of  one  or  more  articles,  yet 
such  a  tax  on  all  commodities  cannot  raise  the 
price  of  all  articles.  If  this  added  charge  in  cost 
of  the  insurance  be  applied  indiscriminately  under 
competitive  conditions  to  producers  in  the  United 
States,  the  possibility  of  its  shifting  to  consumers 
would  be  much  greater  than  by  a  system  under 
which  only  a  part  of  the  competitive  producers 
would  be  assessed  the  cost  of  such  insurance. 
The  enacted  and  proposed  compensation  laws  ap- 
ply only  to  certain  states,  and  even  in  the  states 
which  have  such  laws  there  are  certain  differences 
in  the  law.  Many  other  states  have  no  such 
laws,  and  judging  from  the  general  absence  of 
uniformity  in  the  legislation  of  the  various  states, 
and  especially  in  the  social  legislation,  this  differ- 
ence is  likely  to  continue  in  the  legislation  for 
[190] 


STATE  SOCIAL  INSURANCE 

the  protection  of  the  wage  earner.  It  is  therefore 
not  at  all  certain  that  the  producer  who  im- 
mediately pays  the  cost  of  the  insurance  will  be 
able,  as  the  theory  of  such  insurance  assumes,  to 
shift  the  tax  or  the  cost  of  the  insurance  to  the 
consumer  in  the  form  of  a  higher  price  for  the 
commodity.  The  consumer  is  frequently,  in  these 
days  of  developed  transportation  facilities,  in- 
terstate markets,  and  interstate  business  organ- 
izations, under  no  necessity  to  purchase  the  prod- 
uct from  a  producer  within  his  state.  Indeed 
it  is  the  exception  for  a  producer  to  derive  his 
articles  of  consumption  from  the  state  of  his  resi- 
dence. The  day  of  local  markets  has  passed. 
When  green  vegetables  and  perishable  goods  of 
all  descriptions  are  transported  hundreds  of  miles 
to  markets,  the  local  producer  finds  his  only  im- 
portant control  of  the  local  market  in  his  control 
over  price. 

There  are  but  three  sources  from  which  the  cost 
of  the  insurance  can  be  paid,  viz.  from  the  profits 
of  the  producer,  from  the  wages  of  the  employee, 
and  from  the  consumer  in  the  form  of  a  higher 
price.  I  If  the  cost  is  taken  from  wages,  the  very 
purpose^of  the  insurance  will  be  counteracted, 
since  the  purpose  of  such  insurance  is  to  bring 
[1911 


INSURANCE  AND  THE  STATE 

about  an  improvement  in  the  condition  of  the 
wage  earnerf 

It  remains  then  to  discuss  the  conditions  under 
which  the  cost  might  be  taken  from  the  profits 
or  from  the  price  to  the  consumer.  This  calls  for 
an  examination  of  the  conditions  of  production 
both  as  to  the  prevalence  of  competition  or  mo- 
nopoly and  also  as  to  conditions  of  production; 
that  is,  whether  it  is  subject  to  the  laws  of  constant, 
decreasing,  or  increasing  cost  as  well  as  to  the 
nature  of  the  demand,  whether  elastic  or  inelastic. 
The  possibility  and  desirability  of  shifting  the 
tax  will  be  determined  both  by  the  conditions  of 
cost  under  which  it  is  produced  and  the  character 
of  the  demand.  That  is  to  state,  it  may  be  pro- 
duced under  conditions  of  constant,  decreasing, 
or  increasing  cost,  and  the  demand  for  it  may  be 
elastic  or  inelastic.  The  simplest  case  is  that 
where  each  unit  is  produced  at  a  uniform  cost; 
that  is,  the  expenses  of  production  neither  in- 
crease nor  decrease  greatly  as  the  number  of  units 
produced  is  increased  or  decreased.  Producer 
A  in  state  X,  where  there  is  a  compensation  law, 
would  normally  seek  to  shift  the  cost  of  the  in- 
surance to  the  consumer,  but  his  competitor  B  in 
state  Y,  which  either  has  no  compensation  law 
[192J 


STATE  SOCIAL  INSURANCE 

or  one  levying  a  lower  charge,  might  be  able  to 
supply  the  consumers  of  A  with  the  commodity 
at  A's  old  price.  A  would  then  be  forced  to  pay 
the  cost  of  the  insurance  from  profits  or  attempt  to 
take  it  from  wages.  If  A  has  been  enjoying  large 
profits,  which  means  that  competition  has  not 
been  freely  working,  he  may  pay  the  cost  and  yet 
continue  to  do  a  profitable  business.  The  second 
case  is  when  the  commodity  is  produced  under 
conditions  of  increasing  cost.  Normally  a  tax 
on  consumption  under  this  condition  does  not,  in 
strict  theory,  raise  the  price  by  the  full  amount  of 
the  tax,  since  a  rise  in  price  can  only  come  with  a 
decline  in  quantity  produced,  because  a  lower- 
ing in  quantity  produced  means  a  lowering  of 
the  margin  of  cultivation  or  a  lowering  of  the 
marginal  cost.  If,  then,  the  cost  is  added  to  the 
former  price,  and  the  demand  is  so  elastic  that  a 
smaller  number  of  units  are  produced,  the  tax 
or  cost  added  is  counteracted  in  part  by  the  de- 
creased pressure  on  the  source  of  supply.  If 
producer  A  in  state  X  then  attempts  to  add  the 
cost  of  the  insurance  to  his  former  prtffe,  his  com- 
petitor B  in  state  Y  may  secure  a  part  of  his 
market,  since  A  can  only  afford  to  add  the  cost 
to  the  normal  price  of  the  article  by  reducing  the 
o  [  193  ] 


INSURANCE  AND  THE  STATE 

units  he  produces  and  thus  securing  the  economies 
which  come  by  lowering  the  marginal  cost.  Un- 
der these  circumstances  an  incentive  would  be 
given  to  small-scale  production. 

In  the  case  where  cost  is  subject  to  conditions 
of  increasing  returns,  a  tax  on  consumption  may  in 
strict  theory  raise  the  price  by  the  amount  of  the 
tax  or  even  more.  This  is  primarily  due  to  the 
fact  that  the  rise  in  price  checks  consumption 
under  a  condition  of  little  elasticity  of  the  demand ; 
the  supply  is  reduced  and  the  cost  per  unit  is 
increased,  since  under  the  hypothesis  an  increase 
in  the  units  produced  was  accompanied  by  a  de- 
creased cost  of  production  per  unit.  If,  however, 
the  demand  is  very  inelastic,  a  condition  not 
usually  found  in  the  case  of  articles  produced 
under  conditions  of  increasing  returns,  the  tax  or 
the  cost  of  the  insurance  might  be  added  to  the 
price  of  the  product.  However,  it  is  necessary 
to  consider  the  competitor  B  in  state  Y,  who  is 
not  compelled  to  increase  his  price.  If  A  attempts 
to  add  the  cost  to  the  price  of  the  article,  B  has 
very  great  inducements  to  offer  A's  patrons  the 
article  at  the  old  price,  since  an  increase  in  the 
units  he  produces,  under  the  hypothesis,  brings 
a  decrease  in  the  cost  per  unit.  This  would  be 
[194] 


STATE  SOCIAL  INSURANCE 

true  if  the  demand  for  the  article  was  elastic,  and 
B  might  stimulate  its  increased  consumption  by 
offering  it  at  a  lower  price  than  A's  old  price,  since 
he  has  already  secured  economies  through  the 
greater  number  of  units  produced  by  selling  to 
A's  old  customers.  Under  such  circumstances 
a  powerful  stimulus  would  be  given  to  develop 
large-scale  production  in  state  Y  by  the  laws  of 
state  X. 

There  remains  the  condition  of  monopoly  in 
production  to  investigate.  If  the  producer  A  in 
X  is  not  subject  to  competition,  but  enjoys  a 
monopoly  or  semi-monopoly,  he  is  in  greater  con- 
trol of  price.  As  a  monopolist  he  is  presumed  to 
have  so  adjusted  his  price  as  to  yield  him  the  maxi- 
mum profit.  A  tax  on  monopoly  profits  cannot 
be  shifted,  but  the  cost  of  the  insurance  cannot  be 
viewed  as  a  tax  on  monopoly  profits.  It  is  as- 
sumed that  it  will  be  added  to  the  price  and  borne 
by  the  consumer.  Will  it  be  to  the  interest  of  the 
monopolist  to  do  this  ?  If  the  demand  is  elastic 
and  a  rise  in  price  from  the  addition  of  the  cost  of 
the  insurance  causes  a  decline  in  the  units  consumed, 
the  monopolist  may  be  quite  willing  to  bear  a  part 
or  all  of  the  tax.  This  would  especially  be  true 
if  the  monopolist  was  producing  the  article  under 

[1951 


INSURANCE  AND  THE  STATE 

conditions  of  increasing  returns.  If  the  demand 
is  inelastic  and  the  addition  of  the  cost  of  the 
insurance  to  the  price  does  not  result  in  a  decreased 
demand,  the  monopolist  is  likely  to  shift  the  cost 
to  the  producer.  If  he  is  producing  under  condi- 
tions of  decreasing  returns,  he  may  be  quite  willing 
to  add  the  price  and  accept  a  reduction  in  demand, 
since  this  may  lessen  costs  for  him.  If  the  monop- 
oly is  of  a  public  character,  the  force  of  a  custom- 
ary price  and  the  power  of  the  state  over  the 
rates  or  prices  of  the  service  may  prevent  the 
monopolist  from  increasing  his  price  in  order 
to  shift  the  cost  of  the  insurance,  as  the  theory 
assumes  all  producers  will  do.  However,  too  great 
refinement  in  analysis  should  be  avoided  in  at- 
tempting to  determine  the  bearer  of  the  cost  of 
this  insurance.  In  this  discussion  the  existence 
of  the  competitive  producer  B  in  Y  state  is  the 
significant  factor.  It  is  assumed  that  he  is  free 
from  this  insurance  charge,  and  this  difference  in 
his  favor  always  exists  as  an  immediate  advantage, 
whatever  the  conditions  of  production  and  what- 
ever the  character  of  the  demand. 

The  possibility  of  securing  increased  efficiency  of 
the  laborer,  and  therefore  lowering  the  ultimate 
costs,  must  be  considered  in  connection  with  this 
[196] 


STATE  SOCIAL  INSURANCE 

increased  cost  of  production  and  the  cost  of  living 
for  the  laborer.  Yet  the  workman  is  not  a  con- 
sumer to  the  same  extent  as  he  is  a  producer  in 
this  particular.  However,  the  increased  efficiency 
would  show  itself  only  after  a  time  and  could 
hardly  be  expected  to  apply  only  to  a  state  which 
had  the  particular  compensation  law.  If  the  laws 
were  uniform  for  the  whole  country,  the  argument 
of  increased  efficiency  would  more  forcefully  apply, 
but  so  long  as  there  would  be  difference  in  such 
laws,  it  is  difficult  to  understand  how  chaos  and 
confusion  in  costs  of  production  can  be  avoided. 
It  may  be  argued  that  the  existence  of  a  good 
compensation  law  would  attract  a  high  grade  of 
laborers  to  that  state,  and  hence  greater  efficiency 
would  be  secured,  because  the  employer  could 
select  his  laborers.  But  labor  is  scarcely  so 
mobile  as  to  secure  that  result,  and  even  if  it  was, 
the  state  would  have  the  problem  of  dealing  with 
the  large  number  of  inefficient  who  were  left  over 
after  the  assumed  selective  process  had  been  com- 
pleted. A  state  would  have  no  power  to  apply 
a  protective  tariff  labor  policy  by  which  to  protect 
its  producers.  The  United  States  might  wisely 
use  the  protection  principle  in  this  connection  if 
a  uniform  compensation  law  was  enacted.  The 

[1971 


INSURANCE  AND   THE  STATE 

argument  that  the  costs  of  compensation  can  be 
immediately  shifted  is  somewhat  superficial  and 
fallacious  when  a  careful  analysis  of  the  organiza- 
tion of  production  and  distribution  of  goods  is 
made.  Goods  are  cheaply  and  quickly  shipped 
long  distance  under  our  efficient  system  of  inter- 
state transportation. 

It  may  be  replied  that  the  state  can  save  enough 
by  making  a  monopoly  of  the  business  to  meet  the 
difference  in  costs  of  production  between  a  pro- 
ducer in  that  state  and  one  in  a  state  which  does 
not  have  a  compensation  law.  If  the  state  makes 
the  law  not  only  compulsory,  but  also  makes  insur- 
ance in  the  state  department  compulsory,  doubtless 
a  considerable  saving  can  be  effected  in  agency  and 
operating  expense.  It  is  also  true  that  under  a 
good  compensation  law  employers  would  be  re- 
lieved from  paying  out  large  sums  for  special 
funds,  hospitals,  gifts  to  people  in  distress,  and 
charitable  institutions.  This  might  well  happen 
to  a  certain  extent,  but  it  is  questionable  whether 
it  is  desirable  for  the  state  to  discount  the  phil- 
anthropic motives  of  its  citizens,  if  it  establishes 
such  a  monopoly  for  purely  social  purposes.  It  is 
also  argued  that  the  enactment  of  such  a  law, 
particularly  if  the  state  operates  the  law  under  a 
[198] 


STATE  SOCIAL  INSURANCE 

department  of  state,  will  bring  great  improve- 
ments in  the  relation  of  employer  and  employee; 
that  labor  trouble  will  be  decreased  and  the  inter- 
est of  the  employee  in  his  work  will  be  stimulated. 
In  short  that  efficiency  will  be  greatly  increased. 
Undoubtedly  the  old  system  of  liability  insurance 
in  its  practical  working  has  done  much  to  embitter 
the  wage  earner  against  his  employer  and  society, 
but  the  real  labor  problem  is  too  fundamental  to 
be  solved  by  any  such  temporary  and  trivial 
remedy. 

It  is  proposed  under  a  state  monopoly  to  furnish 
the  protection  to  the  employer  at  cost,  but  how- 
ever great  the  difference  between  that  cost  and  the 
cost  under  a  system  of  compulsory  state  compensa- 
tion under  private  companies,  the  essential  diffi- 
culty arises  between  the  production  cost  to  an 
employer  in  one  state  as  compared  to  the  pro- 
duction cost  of  a  competing  employer  in  another 
state.  If  one  is  to  judge  from  the  experience  of 
the  states  which  have  enacted  social  legislation 
in  the  past,  it  would  be  easy  to  conclude  not  only 
that  all  states  will  in  the  near  future  not  enact  a 
compensation  law,  but  also  that  if  the  advantage 
seems  to  be  with  those  states  which  do  not  have 
such  stringent  laws,  indefinite  postponement  will 
[1991 


INSURANCE  AND  THE  STATE 

occur.  However  desirable  it  might  be  to  have  a 
national  consciousness  on  social  questions,  the 
selfish  and  local  interest  of  a  community  will 
long  be  sufficiently  strong  to  prevent  the  enact- 
ment of  legislation  which  will  result  in  increased 
national  efficiency.  State  lines  are  real  divisions 
when  industrial  and  social  legislation  is  considered, 
and  in  the  matter  of  workingmen's  insurance 
for  industrial  accidents  they  present  the  great- 
est single  problem.  The  theoretical  justification 
of  the  insurance,  its  social  gains,  and  national 
economic  value  can  scarcely  be  doubted,  but  its 
practical  application  by  the  [different  states  pre- 
sents difficult  problems.  The  problems  chiefly 
center  around  the  question  of  rates  and  the  loca- 
tion of  the  costs.  Does  a  state  afford  a  sufficient 
basis  for  equitable  and  fair  rate  making,  or  in  other 
words  are  there  sufficient  representatives  of  the 
various  industries  to  make  the  accident  experi- 
ence in  the  state  representative  for  the  industry  as 
a  whole  ?  In  the  second  place,  will  it  be  possible 
for  the  employer  who  directly  pays  the  cost  of 
such  insurance  to  shift  it  to  his  consumers,  who 
are  neither  as  a  class  residents  of  the  state  nor  are 
compelled  to  buy  his  products  ?  It  is  a  social  cost, 
or  a  consumer's  cost,  which,  under  a  system  of 
[200] 


STATE  SOCIAL  INSURANCE 

single  state  insurance,  will  be  difficult  to  shift  to 
him.  It  is  peculiarly  a  kind  of  insurance  suitable 
for  state  conduct,  since  its  benefits  go  directly  to 
a  very  large  class  of  the  population  and  indirectly 
are  shared  in  by  all  of  the  population.  Every 
employer  has  been  collecting  from  the  public 
sums  sufficient  to  pay  the  cost  of  his  liability 
insurance  as  an  overhead  expense  of  operation. 
He  certainly  has  not  consciously  and  willingly 
foregone  so  much  of  his  profit,  and  it  is  not  to  be 
assumed  under  the  prevailing  conditions  of  com- 
petition among  similar  producers  that  he  has  been 
able  to  take  this  element  of  the  expense  from  the 
wages  of  the  worker.  In  addition  to  this  cost  of 
legal  liability  the  employer  may  have  been  paying 
out  certain  sums  to  his  workmen  in  case  of  sick- 
ness; that  is,  he  may  have  continued  the  wages 
during  the  time  of  sickness  or  during  the  accident. 
He  may  also  have  been  a  liberal  contributor  to 
various  organizations  and  funds  for  the  benefit 
of  the  wage-earning  class.  A  compensation  law 
relieves  him  from  many  of  these  charges,  and  this 
is  especially  true,  it  is  claimed,  when  the  law  is 
administered  by  the  state. 

In  discussing  or  comparing  costs  of  liability  in- 
surance or  compensation  insurance  under  private 
[201] 


INSURANCE  AND  THE  STATE 

companies  to  the  employer,  with  the  costs  of  com- 
pensation insurance  under  the  state,  costs  must  be 
considered  from  a  broad  basis. 

In  the  first  place,  the  employer  is  relieved  from 
paying  a  charge  to  a  private  company  which 
must  expect  to  secure  a  profit  on  the  business 
transacted.  In  the  second  place,  the  compensa- 
tion under  the  state  takes  care  of  the  many  cases 
which  formerly  caused  the  employer  to  make  a 
contribution  although  no  legal  liability  was  in- 
curred. In  the  third  place,  the  employer  is  given 
every  inducement  to  improve  the  working  condi- 
tions of  his  plant  in  a  manner  that  will  reduce  the 
number  of  accidents,  since  his  rate  of  charge  is  based 
in  part  upon  the  injury  experience  of  his  plant. 
The  total  sums  paid  for  direct  compensation  may 
thus  be  made  to  approach  what  he  formerly  paid 
for  liability  insurance.  \  In  the  fourth  place,  the 
relatives  of  the  injured  workman,  as  well  as  mis- 
cellaneous persons,  are  relieved  from  the  money 
expenditure  which  was  made  in  such  cases  to  care 
for  the  injured  worker.  In  the  fifth  place,  society 
is  assured  that  the  workman  will  receive  proper 
care  when  an  injury  occurs,  and  that  he  will  be 
returned  in  many  cases  to  his  work,  whereas  he 
formerly  became  a  charge  upon  society  for  many 


STATE  SOCIAL  INSURANCE 

years  because  he  did  not  have  proper  care  at  the 
time  of  the  injury. 

In  the  sixth_  place,  there  is  good  reason  to  assume 
that  fewer  workmen  will  be  injured,  since  under  a 
good  compensation  law,  and  especially  if  it  is 
administered  by  the  state,  the  employer,  the  em- 
ployee, and  society  are  each  interested  in  reducing 
accidents.  Some  support  to  this  contention  is 
claimed  from  the  experience  in  Ohio.  The  acci- 
dent record  of  those  employers  insured  with  the 
state  under  the  compensation  law  was  in  1912  one 
accident  for  each  two  and  one  half  million  dollars 
of  pay  roll,  while  those  employers  not  so  insured 
had  one  accident  for  each  seven  hundred  and 
fifty  thousand  dollars  of  pay  roll.  It  should  be 
stated,  however,  that  those  insured  with  the  state 
were  probably  the  better  risks.  The  law  had  not 
been  in  force  sufficiently  long  to  make  great 
changes  in  the  conditions  of  the  plants,  but  because 
a  premium  was  placed  upon  plants  with  good  work- 
ing conditions  by  a  low  rate  the  state  secured  the 
better  plants. 

JFmally,  it  may  be  pointed  out,  that  under  a  com- 
pensation law  administered  by  the  state,  the  large 
sums  spent  in  legal  proceedings  would  be  saved. 
From  the  purely  social  viewpoint,   which,  must 
[203] 


INSURANCE  AND  THE  STATE 

be  emphasized  in  discussing  workmen's  insurance, 
these  legal  expenditures  represent  waste.  Al- 
though it  does  not  seem  to  be  an  astounding  state- 
ment to  state  that  when  the  worker  is  injured,  he 
is  injured,  yet  the  procedure  in  the  past  after  such 
injuries  have  been  suffered  shows  that  the  truth 
of  the  statement  has  not  been  accepted.  Never- 
theless, the  social  significance  of  the  fact  is  that 
one  of  the  members  of  society  is  disabled,  and 
further  that  he  should  have  immediate  care  instead 
of  having  a  long  drawn-out  court  proceeding  to 
determine  if  he  was  injured  and  who  is  to  blame 
for  the  injury. 

The  cost  of  compensation  might  therefore  be 
much  greater  than  liability  insurance  and  yet  be 
cheaper.  Even  the  immediate  cost  to  the  em- 
ployer might  be  greater  than  the  former  cost  of 
his  liability  insurance,  and  yet  in  a  series  of  years 
be  cheaper  to  him  in  dollars  and  cents. 

It  is  often  urged  by  those  opposed  to  extending 
the  functions  of  the  state  that  all  the  good  results 
of  workingmen's  compensation  legislation  can  be 
secured  by  permitting  the  employer  to  purchase 
this  insurance  from  private  companies.  Many 
favor  the  principle  of  compensation  but^pppse 
the  plan  of  having  the  state  provide  the  protection. 
[204] 


STATE  SOCIAL  INSURANCE 

It  is  urged  that  this  is  an  unnecessary  interference 
with  private  business ;  that  inefficiency  in  con- 
ducting the  work  will  result  from  the  assumed 
fact  that  the  administrators  of  the  law  will  be 
influenced  by  practical  politics;  that  the  cost  of 
transacting  the  business  will  therefore  be  very 
great  and  more  than  equal  whatever  profit  the 
private  company  would  secure. 

On  the  other  hand  it  is  contended  that  work- 
men's compensation  insurance  furnished  by  private 
companies  would  afford  an  opportunity  or  excuse 
for  the  private  company  to  exact  a  high  charge; 
that  there  would  be  no  means  of  limiting  the 
profit  of  such  companies  or  in  limiting  the  charge ; 
that  competition  would  not  afford  a  safe  protection 
because  one  result  of  such  competition  would  be  a 
"cutting"  of  rates  by  the  private  companies  as  a 
means  of  securing  the  business,  as  has  often  been 
the  case  in  private  liability  insurance;  that  the 
result  of  this  would  be  that  the  adjusters  of  the 
companies  would  attempt  to  settle  claims  for  less 
than  the  sum  provided  in  the  compensation  law 
in  order  to  secure  a  profit  for  the  company  which 
had  been  jeopardized  by  writing  the  business  at 
an  unprofitable  rate.  In  other  words  it  is  urged 
that  the  private  company,  and  almost  equally  the 
[205] 


INSURANCE  AND  THE  STATE 

employer,  would  have  the  same  inducement  to 
keep  the  workman  from  securing  his  award  under 
a  compensation  law  by  private  companies  as  they 
had  under  a  system  of  employer's  liability  insur- 
ance. 

The  state,  in  order  to  prevent  this  result, 
would  be  compelled  to  employ  a  large  number  of 
inspectors  to  secure  the  intended  operation  of 
the  law. 

Neither  private  liability  insurance  companies 
nor  employers  can  be  criticized  for  the  past 
conditions  under  which  the  employee  received 
so  little  indemnity  in  the  event  of  an  industrial 
accident.  The  insurance  company  was  employed 
by  the  employer.  It  was  his  servant  against  the 
employee.  It  did  what  it  was  paid  to  do,  and  the 
less  it  paid  out,  the  less  the  employer  was  forced 
to  pay  in.  Nor  is  it  true  that  neither  the  private 
insurance  company  nor  the  employers  ever  did 
anything  to  aid  and  protect  employees,  but 
it  is  true  that  the  contract  made  between  them 
was  a  purely  business  contract,  made  for  the  two 
parties  interested  in  it  —  the  company  and  the 
employer. 

But  under  a  system  of  compensation  by  the 
state,  it  is  claimed  that  no  individual,  company, 
[206] 


STATE  SOCIAL  INSURANCE 

class,  or  group  has  anything  to  gain  in  attempting 
to  prevent  the  injured  workman  from  securing 
indemnity  for  the  accident.  It  is  manifest  that 
experience  alone  can  prove  or  disprove  many  of 
these  contentions. 


[  207  ] 


CHAPTER  VHI 

THE  RELATION  OF  THE  STATE  TO  SICK- 
NESS, OLD  AGE,  AND  UNEMPLOY- 
MENT INSURANCE 

IT  is,  however,  not  only  industrial  accidents  to 
which  the  wage  earner  is  exposed,  but  also 
to  the  contingencies  of  sickness,  old  age,  and 
unemployment.  The  question  arises  as  to  the 
extent  to  which  the  state  should  protect  him 
against  these  risks. 

It  is  probable  that  sickness  carries  with  it  much 
greater  loss  to  society  than  do  industrial  accidents. 
Sickness  means  not  only  a  temporary  loss  of  em- 
ployment for  many  workers,  and  hence  the  loss  of  a 
productive  force  for  society,  but  it  also  means  that 
this  sickness  may  so  undermine  physical  vitality 
that  either  the  individual's  life  is  shortened  or  he 
becomes  a  charge  on  society  during  many  years  of 
later  life.  The  social  interest  in  preventing  sick- 
ness and  in  devising  means  of  distributing  the  loss 
which  it  entails  is  evident.  In  the  United  States 
[208] 


SOCIAL  INSURANCE 

it  is  estimated  that  about  3,000,000  persons  are 
seriously  ill  all  the  time,  and  of  this  number  900,000 
are  males  fifteen  years  of  age  and  over.  If  the 
insurance  principle  is  to  be  used  to  protect  against 
this  contingency  of  illness  by  action  of  the  state, 
there  is  the  choice  between  a  voluntary  and  a 
compulsory  method. 

An  objection  always  urged  against  any  action 
on  the  part  of  the  state  in  this  particular  is  that 
sickness  is  a  strictly  personal  matter,  and  therefore 
should  be  provided  for  by  the  individual.  Several 
replies  may  be  made  to  this  contention.  In  the 
first  place  many  wage  earners  do  not  receive  a 
wage  from  which  a  surplus  is  left,  after  providing 
the  necessities,  to  purchase  the  protection  against 
sickness.  In  the  second  place,  even  if  the  wage 
does  make  such  a  surplus  possible,  many  of  them, 
from  lack  of  thrift  and  imagination,  would  not 
voluntarily  provide  for  sickness.  In  their  self- 
confidence  they  think  the  period  of  sickness  is  too 
indefinite  and  will  befall  some  other  wage  earner. 
In  the  third  place,  society  now  provides  for  the 
wage  earner  in  times  of  sickness,  however  moder- 
ate and  insufficient  the  provision  may  be.  Hence 
a  charge  is  now  borne.  While  the  risk  of  sickness 
exists,  yet  this  risk  for  the  wage  earner  is  more 
p  [  209  ] 


INSURANCE  AND  THE  STATE 

definitely  connected  with  his  work,  and  he  is 
more  helpless  in  preventing  it.  Many  are  forced 
to  work  under  unsanitary  surroundings.  They 
are  exposed  in  the  crowded  quarters  to  infectious 
diseases.  Their  food  is  often  unwholesome  and 
their  clothing  often  insufficient.  But  a  distinc- 
tion, however  slight  in  many  cases,  must  be  made 
between  the  obligation  of  wage  earners  to  pro- 
vide sickness  and  industrial  accident  insurance. 
The  latter  is  clearly  a  social  charge  which  should 
not  in  any  part  be  borne  by  the  wage  earner 
except  as  a  consumer.  Society  is  not,  however, 
so  completely  responsible  for  sickness,  since  it  does 
not  have  complete  control  over  its  causes.  Then, 
too,  society  must  be  greatly  interested  in  encourag- 
ing and  stimulating  all  its  members  to  live  more 
hygienically,  to  adopt  habits  of  clean  and  whole- 
some living,  and  to  become  thrifty.  These  stimuli 
may  in  part  be  supplied  by  compelling  the  wage 
earner  to  pay  a  part  of  the  cost  of  sickness  insur- 
ance. There  would  also  seem  good  reasons,  both 
on  the  ground  of  theory  and  economy,  to  make  it 
a  state  monopoly.  Certainly  it  is  a  source  from 
which  private  individuals  should  not  be  permitted 
to  take  profit.  Yet  the  collections  or  payments  for 
the  insurance  would  need  to  be  made  by  the  state 
[210] 


SOCIAL  INSURANCE 

through  the  employer  from  the  wage  of  the  em- 
ployee. As  a  matter  of  practical  administration 
the  insurance  against  sickness  for  wage  earners 
can  easily  and  economically  be  applied  in  connec- 
tion with  the  industrial  accident  insurance.  It 
is,  in  fact,  a  part  of  social  insurance  which  is  not 
easily  separated  from  industrial  accident  insur- 
ance. The  employer,  as  in  Germany,  might  also 
be  assessed  a  part  of  the  cost  and  the  remainder 
be  contributed  directly  by  the  state  from  general 
taxation,  since  the  prevention  of  illness  is  a  sub- 
ject of  general  concern.  Yet  the  same  practical 
objection  to  its  application  by  a  state  would  arise 
as  in  the  case  of  the  industrial  accident  insurance. 
There  would  be  the  same  difficulty  of  shifting  the 
costs  from  the  producer  to  the  consumer,  although 
the  necessity  to  do  so  would  not  be  as  great  as  in 
the  accident  insurance^  since  the  particular  state 
might  very  directly  benefit  from  a  plan  of  sickness 
insurance  applied  only  in  the  state.  However, 
confusion  would  almost  certainly  result  from  the 
diverse  plans  of  the  various  states,  which  differ- 
ently affected  costs  to  the  producers.  The  oppor- 
tunities for  economy  in  applying  the  insurance 
plan  through  a  state  monopoly  rather  than  by 
private  companies  would  be  as  great  as  in  indus- 
[211] 


INSURANCE  AND  THE  STATE 

trial  accident  insurance.  The  savings  in  agency 
expense  under  a  state  monopoly  of  compulsory 
sickness  insurance  would  probably  be  large,  as 
well  as  the  savings  from  overhead  expense  of 
operation.  Some  difficulty  might  arise  in  the 
determination  of  rates,  since  the  amount  of  sick- 
ness is  a  function  of  age,  constitution  of  the  popula- 
tion, climatic  conditions,  and  character  of  the  in- 
dustrial life.  That  is  to  state,  the  cost  in  one 
state  as  compared  with  another  might  be  much 
higher  per  capita,  and  the  state  might  not  afford 
a  proper  basis  for  the  determination  of  rates. 
The  problem  of  old-age  insurance  has  been 
well  stated  by  G.  W.  Squiers  in  his  book  on 
"  Old  Age  Dependency  "  in  the  following  words : 
"Actuaries  tell  us  that  out  of  one  thousand  men 
living  at  the  age  of  twenty,  five  hundred  will  still 
be  living  at  the  age  of  sixty-five.  Economists  and 
statisticians  tell  us  that  of  the  living  at  the  age  of 
sixty-five,  two  hundred  will  be  in  want  and  that 
eight  ninths  of  all  the  pauperism  in  the  country  is 
among  people  who  have  passed  the  age  of  sixty- 
five."  The  essential  social  and  economical  prob- 
lem arising  is  not  what  shall  be  done  with  this 
large  number  of  dependent  old,  but  what  can  the 
state  do  to  reduce  the  number  who  become  depend- 
[212] 


SOCIAL  INSURANCE 

ent.  Neither  the  public  almshouse  nor  private 
charity  correct  the  condition.  They  only  relieve 
the  situation.  Shall  the  state  institute  a  system 
of  old-age  pensions  to  prevent  these  large  num- 
bers from  reaching  the  age  of  destitution  when 
they  become  a  burden  to  the  state  ?  Should  it 
establish  a  system  of  self-maintenance  in  old  age 
from  the  contributions  on  the  part  of  the  industrial 
worker  ?  Thus  arise  the  two  plans.  One,  a 
system  in  which  the  state  makes  the  full  contribu- 
tion, and  the  other  in  which  the  small  annual 
contributions  are  made  by  the  wage  earner  during 
his  productive  years.  The  theory  of  the  first 
plan  is  that  the  wage  earner  does  not  receive  a  full 
return  for  his  labor  under  the  competitive  wage 
system,  and  society  in  his  old  age  pays  him  this 
difference  in  the  form  of  an  old-age  pension.  It  is 
given,  not  as  a  matter  of  charity,  but  as  a  payment 
for  service  rendered  during  the  productive  years. 
It  is  a  deferred  and  contingent  additional  compen- 
sation for  past  services.  In  the  second  plan,  it 
is  said  that  whatever  pretense  is  made  that  the 
pension  is  a  payment  for  services  rendered,  the 
real  effect  is  to  discount  thrift  on  the  part  of  the 
wage  earner  and  make  him  the  recipient  of  a  char- 
ity which  injures  his  self-respect,  and  by  producing 
[213] 


INSURANCE  AND  THE  STATE 

a  feeling  of  parasiteship,  greatly  reduces  his  poten- 
tial social  and  economic  efficiency.  Yet,  however 
desirable  it  may  be  for  the  wage  earner  to  set  aside 
a  fund  for  old  age,  the  actual  realization  of  such  a 
thing  is  impossible  for  many.  Whether  this  is  a 
result  of  lack  of  thrift  or  a  result  of  receiving 
an  unjust  wage  is  immaterial  for  the  purpose  of 
discussing  the  place  of  the  state  in  a  system  of  old- 
age  insurance. 

The  system  of  providing  such  insurance  presents 
no  difficulty  from  an  actuarial  standpoint,  and 
hence  the  state  need  not  hesitate  to  assume  the 
business  for  this  reason.  The  number  reaching 
a  certain  age  can  be  accurately  determined  as  well 
as  the  sum  necessary  to  be  collected  to  pay  the  old- 
age  pensions.  Nor  need  there  be  much  doubt  that 
the  state  could  transact  the  business  at  a  greater 
economy  than  private  companies,  if  it  were  made 
compulsory.  Nor  is  there  any  doubt  of  the  social 
value  of  old-age  insurance.  The  Massachusetts 
Commission  of  1910,  which  investigated  the  sub- 
ject, estimated  that  the  cost  in  that  year  of  main- 
taining the  dependents  of  sixty-five  and  over  would 
be  for  the  United  States  $178,899,968.  For 
Massachusetts  alone  it  would  be  $6,180,406. 
The  sum  which  would  be  required  under  a  state 
[214] 


SOCIAL  INSURANCE 

old-age  pension  scheme  would  depend  upon  the 
character  of  the  law,  as  to  eligibility,  the  amount 
paid,  and  the  age  constitution  of  the  population  of 
the  state.  Some  very  practical  difficulties  might 
arise  in  the  application  of  a  scheme  of  state  com- 
pulsory old-age  pensions.  First,  as  to  the  source 
of  the  funds  to  pay  the  pensions.  Should  a  period 
of  residence  be  required,  and  if  so,  how  long  ?  Un- 
less this  were  true,  would  not  a  state  be  burdened 
with  a  large  number  of  the  aged  from  the  other 
states  ?  If  the  state  does  not  pay  the  total  cost, 
should  it  be  assessed  upon  employers  in  part  and 
in  part  on  the  employees  ?  Would  an  employer  be 
able  to  shift  to  the  consumer  of  his  product  the  cost 
of  this  contribution  if  other  states  did  not  have 
a  similar  law?  Might  he  not  be  forced  to  take 
from  profits,  if  they  existed,  or  be  induced  to  try 
to  get  it  from  wages  ?  If  the  employee  contrib- 
utes, what  becomes  of  his  contribution  when  he 
removes  to  another  state  ?  Would  his  wage  be 
sufficient  to  make  the  contribution  ?  Would  he 
be  willing  to  permit  it  to  be  taken  from  his 
weekly  wage,  when  in  an  adjoining  state  he 
could  receive  his  full  wage  to  use  as  he  pleased  ? 
These  and  many  other  practical  difficulties  would 
need  to  be  solved  before  the  states  in  the  United 
[215J 


INSURANCE  AND  THE  STATE 

States  could  enter  upon  a  plan  of  old-age  insur- 
ance. 

"suEJect  of  Unemployment  Insurance  by  the 
state  introduces  a  problem  differing  very  greatly 
from  that  considered  in  the  previous  forms  of 
insurance.  The  appeal  made  to  the  socially 
minded  is  equally  as  strong  for  unemployment 
insurance  as  in  the  other  cases,  but  the  solution 
of  the  problem  is  infinitely  more  difficult.  In- 
stances of  no  work  for  the  willing  worker  appeal 
strongly  to  our  sympathy.  To  have  a  dependent 
family  with  no  opportunity  to  earn  a  wage  to 
support  them  is  a  hardship.  Society  is  interested 
in  having  the  worker  earn  his  wage,  not  only  to 
escape  the  burden  of  supporting  him  and  his  de- 
pendents, but  also  because  of  the  indefinite  but 
none  the  less  powerful  effect  which  it  has  upon 
social  and  industrial  efficiency.  But  does  a 
system  of  unemployment  insurance  afford  the 
remedy?  This  calls  for  a  brief  reexamination  of 
the  insurance  principle.  Among  the  several  req- 
uisites  foran  application  of  the  insurance  prin- 
ciple the  following  are  pertinent  to  our  discussion. 
There  must  be  a  risk  which  appeals  to  those  inter- 
ested as  being  worth  providing  against.  To  this 


risjjjarge  numbers  must  be  exposed.    The  risk  must 

^ 


SOCIAL  INSURANCE 

be  cgpqble-of  being  calculated  with  some  degree  of 


certainty.  The  nature  of  the  risk  must  be  clearly 
specified.  In  neither  of  the  last  two  particulars 
does  unemployment  fulfill  the  conditions.  The 
statistics  of  unemployment  are  not  sufficiently 
accurate  to  base  a  scientific  system  of  insurance 
upon  them,  and  unemployment  itself  canneither 
be  accurately  specified  nor  its  amounts  calculated 
on  account  of  the  various  conditions  nfjingmplny- 
ment  and  the  numerous  uncontrollable  forces. 
which  produce  it.  It  is  impossible  to  state  what 
work  each  is  able  to  do,  or  what  work  he  should 
do  and  under  what  circumstances  he  should  be 
forced  to  work  in  case  of  unemployment.  Unem- 
ployment may  be  due  to  the  workman's  fault; 
it  may  be  due  to  a  strike  or  a  lockout  in  the  plant 
in  which  he  works,  or  in  a  related  plant  or  an  indus- 
try. It  may  be  due  to  industrial  depressions  or 
financial  stringency,  the  occurrence  of  which  can- 
not be  predicted.  It  may  be  due  to  such  chance 
elements  as  war,  climate,  or  fires.  Scientific 
insurance  can  only  be  applied  when  the  initial 
risTTIs-raloulablo  and  its  fulmc  Jt^i'CO  is  alw- 
known  to  an  accurate  extent  —  Whatever  plans 
are  in  practice  among  trade-unions  and  other 
organizations  are  not  based  on  any  scientific  insur- 
[217J 


INSURANCE  AND  THE  STATE 

ance  principles.  They  are  but  mutual  agree- 
ments to  pay  certain  sums  in  cases  of  unemploy- 
ment, without  any  reference  to  the  particular 
source  of  the  funds  or  their  recipients.  Another 
objection  to  unemployment  as  a  plan  of  social 
improvement  is  that  it  is  not  essentially  a  method 
of  correcting  an  economic  and  social  evil,  ^ujLia_ 
simply  a  method  of  relief.  Unemployment  in 
itself  is  an  evidence  of  a  defective  economic  organ- 
ization. Relief  may  frequently  tend  to  weaken 
the  recipient  of  it. 

A  distinction  must  be  made  between  assist- 
ance to  the  unemployed  and  unemployment  insur- 
ance. The  insurance  plan,  if  it  is  placed  in  opera- 
tion, gives  a  legal  right  to  the  assistance,  while  the 
former  is  based  upon  an  expectation  of  relief 
from  a  purely  mutual  or  social  arrangement.  In- 
surance could  not  be  based  upon  the  caprice  of  the 
human  will,  and  yet  unemployment  might  arise 
from  this  source.  A  worker  might  stop  work,  not 
because  of  unsatisfactory  wages,  long  hours, 
unsanitary  surroundings,  but  on  account  of  the 
personal  character  of  his  employer.  He  might 
join  with  his  fellow-workmen  in  a  strike  to  secure 
justifiable  improvements  in  wages  or  conditions 
of  work.  He  might  strike  while  working,  and  the 
[218] 


SOCIAL  INSURANCE 

employer  would  declare  a  lockout,  leaving  the 
worker  unemployed.  Yet  all  the  evils  of  unemploy- 
ment might  result  regardless  of  the  reasons  of  the 
unemployment.  It  is  the  unemployment  which 
brings  the  evil  to  be  provided  against,  and  not  the 
causes  of  the  unemployment.  The  problem  of 
finding  a  method  of  applying  the  insurance  prin- 
ciple to  unemployment  is  therefore  very  great. 
While  the  risks  of  unemployment  in  the  different 
industries  cannot  be  accurately  calculated,  yet 
this  is  not  a  vital  objection  if  the  insurance  is 
considered  purely  on  its  social  basis.  -All 
insurance  is  mutual  and  i 


of  a  risk  that  is  primarily  individual.  The  effect 
of  applying  this  principle  would  be  to  throw  upon 
the  regular  trade  the  risks  of  unemployment  in 
other  trades.  It  would  also  probably  be  neces- 
sary to  collect  a  part  of  the  funds  for  such  insur- 
ance from  the  employer. 

The  difficulty  of  applying  a  system  of  unem- 
ployment insurance  in  a  state  as  a  monopoly 
would  be  very  great.  Not  only  would  all  the 
theoretical  objections  to  such  a  distortion  of  the 
insurance  principle  prevail,  but  the  practical 
difficulties  of  state  boundary  lines  would  exist. 
The  states  differ  very  greatly  in  the  character  of 
[2191 


INSURANCE  AND  THE  STATE 

their  industrial  life.  Unemployment  is  much 
more  common  in  some  states  than  in  others,  and  a 
system  of  unemployment  insurance  might  be  a 
haven  of  refuge  for  the  habitually  or  even  acutely 
unemployed.  ltmil 

~Tliere  remains  then  to  summarize  the  discussion 


of  the  benefits  of  social  insurance  and  the  obstacles 
to  the  application  of  such  insurance  in  the  states  of 
the  United  States.  In  the  first  place  Germany 
affords  an  example  of  the  effects  of  a  fairly  wide 
application  of  social  insurance.  It  has  been  in 
operation  almost  a  generation  in  some  of  its  forms, 
and  hence  its  benefits  can  more  accurately  be 
known.  Social  Insurance  is  peculiarly  character- 
ized by  the  fact  that  its  effects  can  only  be  known  _ 
after  a  long  series  of  years.  Social  and  economic 
improvement  among  a  people  is  only  shown  after 
time  has  elapsed  to  alter  the  character  of  the  indi- 
vidual. In  Germany  social  insurance  commands 
the  approval  of  all  classes  by  its  results.  It  has 
produced  a  powerful  effect  in  the  normal  and 
material  life  of  the  German  people  and  has  doubt- 
less had  not  a  little  to  do  in  bringing  to  the  Ger- 
mans that  reputation  which  they  have  for  indus- 
trial efficiency.  In  the  second  place,  a  system 
of  social  insurance  makes  possible  the  improve- 

[220] 


SOCIAL  INSURANCE 

ment  of  the  conditions  of  work.  This  expresses 
itself  in  the  form  of  protective  devices  to  prevent 
injuries,  the  invention  of  methods  of  reducing  the 
loss  of  life  in  dangerous  trades,  the  improvement 
in  the  sanitary  and  hygienic  surroundings  of  the 
worker  in  the  factory  and  the  home.  It  tends 
to  reduce  excessive  hours  and  application  for  the 
worker.  It  popularizes  scientific  knowledge  in 
regard  to  health.  It  increases  the  efficiency  of 
the  worker,  not  only  because  it  protects  his  health, 
but  also  because  it  increases  his  length,  as  well  as 
his  breadth  of  life.  It  relieves  him  of  the  worry 
connected  with  temporary  or  permanent  disability 
and  of  old-age  dependency.  Nor  are  the  purely 
moral  effects  lacking.  It  is  a  powerful  factor  in 
producing  a  better  feeling  on  the  part  of  the 
worker  toward  his  employer  and  society.  The 
self-respect  of  the  worker  is  preserved  by  a  realiza- 
tion of  the  mutual  relationship  of  worker,  employer, 
and  society.  No  class  is  under  the  system  benefit- 
ing from  the  misfortune  of  another  class,  but  each 
joins  with  all  others  to  bear  a  common  burden. 

It  has  not  in  Germany  produced  any  burden 

upon  the  industrial  and  commerical  advance  of  the 

nation,  but  has  undoubtedly  accelerated  it.     If 

the  effects  of  Social  Insurance  are  then  so  dis- 

[2211 


INSURANCE  AND   THE  STATE 

tinctively  social,  the  reasons  for  making  it  state 
insurance  rather  than  private  insurance  would 
seem  to  be  strong.  It  is  a  state  need,  and  what  is 
primarily  a  matter  of  public  concern  should  not 
be  used  as  a  source  of  revenue  for  individuals. 
The  particular  advantages  of  the  state  assum- 
ing the  business  would  be:  (1)  The  state  could 
offer  an  absolute  security  and  certainty  which 
would  sometimes  not  be  present  if  it  were  in  the 
hands  of  private  companies.  (2)  The  state  could 
secure  economies  that  would  not  be  possible  under 
a  system  of  private  insurance.  These  would 
consist  in  the  collection  of  smaller  revenue,  in  a 
reduction  in  the  agency  expense,  and  in  the  operat- 
ing or  management  expenses,  and  finally  in  the 
absence  of  any  profits.  (3)  The  state,  by  assum- 
ing all  the  business  rather  than  having  it  trans- 
acted by  many  private  companies,  would  be  able 
to  attack  the  difficult  actuarial  problems  in  a  sys- 
tem of  social  insurance,  with  the  result  that  rates 
for  the  different  kinds  of  insurance  and  the  differ- 
ent classes  of  contributing  members  would  be  more 
equitable.  The  statistics  could  be  economically 
and  more  accurately  collected.  (4)  Under  a  sys- 
tem of  state  insurance  voluntary  organizations  for 
this  purpose  could  be  preserved  and  encouraged. 
[222] 


SOCIAL  INSURANCE 

A  system  of  State  Social  Insurance  should  be 
devised  only  to  provide  minimum  insurance,  and 
the  recipients  should  be  encouraged  to  use  the 
insurance  principle  to  provide  by  mutual  associa- 
tions additional  insurance. 

Yet  with  all  these  undoubtedly  good  results 
and  promises  in  prospect  under  a  system  of  Social 
Insurance  by  the  state  it  is  difficult  to  apply  it  in 
the  states  of  the  United  States.  It  is  easy  to 
become  so  enthusiastic  over  the  excellent  social 
results  promised  in  view  of  the  deplorable  condi- 
tions existing  among  the  wage-earning  classes 
that  no  sympathy  or  patience  with  the  objectors 
to  its  practicability  can  be  felt.  The  very  name  at- 
tached to  this  form  of  insurance  —  Social  —  should 
impress  one  that  it  is  applicable  only  to  a  social 
and  industrial  unit.  Yet  our  separate  states  do 
not  afford  an  example  of  such  units.  The  fact 
that  it  has  received  a  modified  application  in  some 
states  in  the  form  of  state  industrial  accident 
insurance,  and  that  it  has  placed  no  evident  hard- 
ship on  the  state  nor  that  unworkable  features 
appear  in  it,  is  not  final  evidence  of  its  success. 
Its  results  can  only  be  told  after  a  series  of  years. 
The  laws  have  been  in  operation  only  a  few  years 
in  the  states  of  the  United  States. 
[223] 


INSURANCE  AND  THE  STATE 

No  system  of  State  Social  Insurance  should  be 
desired  which  does  not  leave  a  wide  field  of  opera- 
tion for  voluntary  insurance  plans  among  the  wage 
earners  and  between  them  and  their  employers. 
Mutual  societies  should  be  encouraged,  and  the 
state  should,  by  a  system  of  established  require- 
ments and  inspections  of  such  organizations, 
provide  for  their  perpetuity.  Some  enthusiastic 
social  reformers  forget  that  the  basic  principle  of 
social  insurance  is  to  provide  minimum  insurance. 
The  development  of  thrift  and  individual  respon- 
sibility among  wage  earners  is  no  less  a  subject  for 
state  concern  than  relieving  them  of  these  mis- 
fortunes, endured  in  a  large  part  for  the  benefit  of 
society.  But  no  magic  power  resides  in  the  imper- 
sonal state.  No  enduring  and  efficient  society  has 
ever  existed,  except  as  the  individual  members 
composing  it  exemplified  social  efficiency.  Attain- 
ing social,  industrial,  and  intellectual  excellence 
is  very  largely  an  individual  matter.  If  a  method 
can  be  devised  of  enacting  a  federal  law  for  such 
insurance,  its  good  results  can  scarcely  be  doubted. 
If  such  a  law  were  passed,  making  uniform  and 
compulsory  provision  for  industrial  accidents  and 
sickness,  and  the  states  were  intrusted  with  the 
administration  of  the  law,  the  collection  of  the 
[224] 


SOCIAL  INSURANCE 

funds,  and  their  payments  to  the  beneficiary, 
few  of  the  difficult  problems  of  the  system  under 
the  states  would  result.  Producers  would  be  left 
in  the  same  situation  as  before  the  passage  of  the 
act.  There  would  be  no  inducement  in  the  law 
for  the  transfer  either  of  capital  or  of  labor.  Each 
competitor  would,  so  far  as  the  provision  of  the 
law  is  concerned,  remain  as  strong  or  as  weak  a 
competitor  as  he  was  before  the  enactment  of 
the  law.  What  was  an  industrial  and  social  bene- 
fit for  the  nation  would  be  nationally  applied. 
The  common  welfare  would  be  promoted  by  this 
general  agency  for  social  and  industrial  efficiency. 
In  the  absence  of  such  a  law  the  application  of  the 
principle  in  view  of  past  experience  will  be  diffi- 
cult. Some  states  will  delay  the  enactment  of 
the  principle,  and  among  those  which  provide  the 
insurance  great  difference  in  the  laws  will  be 
found. 


225 


INDEX 


Advantages  of  state  social  in- 
surance, 222. 

Agency  expense,  41-45. 

Anti-coinsurance  law,  144-146. 

Anti-compact  laws,  122. 

Assets  in  life  and  fire  insurance, 
93,  94. 

Average  loss  in  fire  insurance, 
104-107. 

Civil  service  and  state  insurance, 
70-72. 

Classification  in  fire  insurance, 
96,  98,  120,  121. 

Commissions,  in  fire  insurance, 
110;  effect  of  reducing,  125, 
126 ;  in  life  insurance,  42-46. 

Compensation,  the,  and  liability 
principle,  171-173. 

Compensation  and  liability  in- 
surance costs,  202-206. 

Competition  and  cooperation  in 
fire  insurance,  149. 

Compulsory  fire  insurance,  150 ; 
wage-earner's  insurance,  183. 

Conflagrations  and  state  insur- 
ance, 91. 

Constitutional  obstacles  to  state 
insurance,  78-80. 

Contract,  the  fire  insurance,  83- 
86. 

Contract  nature  of  insurance,  79. 

Cooperation    and  insurance,    15. 

Costa,  insurance,  analyzed,  36- 
58,  193-207;  shifting  liability 
insurance,  189-198. 


Damages,  liability  awarded,  180. 
Discrimination  in  fire  insurance, 
147-149. 


Dividends,  40,  41. 

Expenses,  fire  insurance,  109- 
112;  liability  insurance,  186. 

Failure  of  fire  insurance  com- 
panies, 117-118. 

Fire  insurance,  nature  of,  ch.  5. 

Fire  insurance  and  life  insurance 
compared,  83-94. 

Fire  insurance  as  a  tax,  86. 

Fire  loss,  the  annual,  90,  132,  138. 

Fire  marshals,  141-144. 

Growth  of  insurance,  60-63. 

Indemnity  under  state  insurance, 

74-80. 

Industrial  insurance,  162. 
Inspection  in  fire  insurance,  112, 

113. 

Interest  rate,  38,  39. 
Investment  risk  in  fire  insurance, 

92-94. 
Italian  monopoly    of   insurance, 

15-18. 

Legal  status  of    insurance,   2-4. 
Liability,  employer's,  in   Roman 

law,  167 ;  in  the  United  States, 

169-174. 
Liability  private  companies,  176. 

Methods  of  increasing  the  in- 
sured, 35. 

Money,  keeping,  in  the  state,  69, 
70. 

Monopoly  in  insurance,  66,  67, 
114-118,  185-190. 

Mutual  relief  associations,  174, 
175. 


[227] 


INDEX 


New  business,  48. 

Obstacles  to  state   social  insur- 
ance, 22O-225. 

Old-age  insurance,   212-216. 
Operating  costs,  46-55. 

Premium  receipts,  50. 
Profit  and  insurance,  9. 
Profit  underwriting,  104. 

Rates  in  fire  insurance,  119-132. 
Rating  bureaus,  121,  122. 
Rate  wars,  124. 
Regulation   insurance   and   state 

insurance,      65-69,       114-118, 

130-132. 

Relief  associations,  177. 
Rents,  insurance,  56. 
Revenue,  state,   from  insurance, 

31-34. 

Risk,  the,  in  insurance,  5-6,  14. 
Risks,  sub-standard,  under  state 

insurance,  64 ;    in  life  and  fire 

insurance,  87,  90. 

Schedule  rating,  89-100. 
Sickness,    social    significance    of, 

208-210 ;      insurance    against, 

211. 

Social  aspect  of  insurance,  7. 
Social  insurance,  nature  of,  ch.  VI. 


Social  purposes  of  state  insur- 
ance, 34-65 ;  132-142. 

State,  function  of,  7-8. 

State  fire  insurance  as  a  source 
of  revenue,  101-113. 

State  insurance,  ch.  II ;  in  Italy, 
15-18;  in  Switzerland,  19; 
in  Germany,  20 ;  in  Wisconsin, 
21-23 ;  in  Massachusetts,  24- 
25;  in  Ohio,  26-29;  reasons 
for,  30. 

State  monopoly  of  life  insur- 
ance, ch.  Ill ;  of  fire  insur- 
ance, ch.  V;  of  social  insur- 
ance, ch.  VII. 

Statistics,  of  fire  insurance,  95; 
of  liability  companies,  179. 

Surplus  in  fire  insurance,  116. 

Taxation  of  insurance,  3,  12,  109, 
111. 

Unemployment,   causes  of,   218, 

219. 
Unemployment   insurance,    216- 

220. 

Valued  policy  laws,  142,  143. 

Wage-earner's  insurance,  how  it 
arose,  162-170. 


[228] 


*HE  following  pages  contain  advertisements  of  a 
few  of  the  Macmillan  books  on  kindred  subjects 


Principles   of  Insurance 

By  W.    F.    GEPHART 

Cloth,  ismo,  313  pages,  index,  %i.6o  net;  by  mail,  $1.73 

Life,  Accident  and  Health,  and  Liability  Insurance  are  discussed 
in  this  work  in  such  a  clear  and  simple  manner  that  even  a  person 
possessing  no  previous  knowledge  of  the  subject  is  enabled  to  read- 
ily acquire  a  thorough  comprehension  of  the  principles  and  methods 
of  the  insurance  business.  That  this  assertion  may  be  confidently 
made,  is  no  doubt  largely  due  to  the  fact  that  the  author  has  not 
only  offered  to  his  college  students  a  course  on  Insurance  for  a 
number  of  years,  but  he  has  also  served  a  long  apprenticeship  in  the 
business  about  which  he  now  writes  so  concisely  and  authoritatively. 

Although  the  book  will  prove  invaluable  to  the  large  army  of  in- 
surance workers  and  purchasers,  it  was  written  primarily  for  use  as 
a  text  in  college  courses. 

S.  E.  Stilwell,  Ph.D.,  F.A.S.,  Actuary  of  the  Ohio  Insurance  De- 
partment, who  has  read  and  criticised  the  MS.  and  aided  in  writing 
the  parts  of  the  book  which  pertain  to  the  actual  aspects  of  the  sub- 
ject, makes  the  following  statement  regarding  the  book : 

"  It  is  a  book  along  distinctively  new  lines  in  that  it  includes  in 
one  volume  a  concise  and  logical  treatment  of  the  fundamental 
principles  and  practices  of  life  insurance  together  with  a  chapter  on 
Health  and  Accident  Insurance  and  a  chapter  on  Employers'  Lia- 
bility Insurance  —  which  kinds  of  insurance  are,  in  some  states, 
permitted  a  life  insurance  company  to  transact.  The  book  ought  to 
be  of  great  value  to  college  students,  for  whom  it  was  primarily 
written,  and  to  practical  insurance  men  including  insurance  agents. 
The  author  has  had  practical  experience  in  the  insurance  business 
and  has  been  a  teacher  of  the  subject  in  the  department  of  Econom- 
ics for  a  number  of  years,  and  has  therefore  been  able  with  some 
small  actuarial  assistance  to  write  a  book  which  will  meet  the  needs 
of  the  various  classes  interested  in  the  subject  of  insurance." 


THE    MACMILLAN    COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Social   Insurance 
A   PROGRAM    FOR   SOCIAL   REFORM 

By  HENRY   R.    SEAGER 
Professor  of  Political  Economy  in  Columbia  University 

Cloth,  I2mo,  $1.00  net;  postpaid,  $1.12 


Social  workers,  political  leaders,  editors,  and  teachers 
will  rejoice  that  an  economist  of  the  first  rank  like  Dr. 
Seager  examines  the  growing  evils  of  industrial  acci- 
dents, illness,  premature  death,  unemployment,  and  old 
age  in  this  country,  and  shows  us  how  their  burdens 
may  be  carried  collectively  through  the  principle  of 
insurance.  European  experience  on  this  subject  is  al- 
ready extensive.  Dr.  Seager  studies  it  critically  and 
applies  it  to  a  timely  discussion  of  American  facts  and 
conditions  in  a  most  sane,  courageous,  and  helpful  little 
book. 


THE    MACMILLAN    COMPANY 

Publishers           64-66  Fifth  Avenue  New  Tork 


Increasing  Human  Efficiency 
in  Business 

BY  WALTER   DILL   SCOTT 

Illustrated,  cloth,  I2mot  $f*2j  net ;  postpaid, 

The  author  of  this  work,  who  is  Professor  of  Psychology  in  North- 
western University,  has  been  for  a  number  of  years  engaged  in 
the  application  of  the  principles  derived  from  psychology  to, 
business,  and  the  results  of  his  investigations  are  incorporated  in 
the  present  volume. 

The  author  first  considers  the  possibility  of  increasing  human 
efficiency  and  shows  that  while  old  methods,  old  tools,  old  instru- 
ments, have  been  discarded  for  new  and  far  more  effective  sub- 
stitutes, man  is  the  only  factor  which  has  withstood  the  change. 
The  contention  is  that  human  efficiency  is  a  variable  quantity 
which  increases  and  decreases  according  to  law.  By  the  applica- 
tion of  known  physical  laws  the  telephone  and  telegraph  have 
supplanted  the  messenger  boy.  By  the  laws  of  psychology  applied 
to  business,  equally  astounding  improvements  are  being  and  will 
be  secured. 

"  In  this  book  one  of  the  country's  best-known  practical 
psychologists  shows  how  this  science  will  help  you  ...  in 
making  sales,  closing  deals,  writing  advertisements,  hiring  and 
handling  employees.  It  shows  how  men  Think  and  Act;  how 
they  are  influenced  by  both  Argument  and  Suggestion.  Your 
success  depends  largely  upon  your  ability  to  influence  men.  This 
book  shows  a  practical  way  to  increase  that  ability."  —  Banker  and 
Investor  Magazine. 

"  We  commend  Professor  Scott's  book  to  all  who  may  be  inter- 
ested in  the  subject ;  for  while  there  is  much  more  to  be  said 
than  he  says,  yet  what  he  does  say  is  calculated  to  make  the 
reader  think  and  act  for  himself;  and  no  book  can  do  better 
than  that."  —  Dun's  Review. 

"  An  important  contribution  to  the  literature  of  business 
psychology."  —  The  American  Banker. 


THE   MACMILLAN  COMPANY 

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Elementary  Principles  of  Economics 

BY  IRVING   FISHER 

Professor  of  Political  Economy,  Yale  University 

Cloth,  I2mo,  331  pages,  $2.00  net 


EXTRACTS  FROM  THE  PREFACE 

Of  the  many  possible  methods  of  writing  economic  textbooks,  there  are 
three  which  follow  well-defined,  though  widely  different,  orders  of  topics. 
These  are  the  "historical,"  the  "logical,"  and  the  "pedagogical."  .  .  . 

The  pedagogical  begins  with  the  student's  existing  experience,  theo- 
ries, and  prejudices  as  to  economic  topics,  and  proceeds  to  mold  them 
into  a  correct  and  self-consistent  whole.  The  order  of  the  first  method, 
therefore,  is  from  ancient  to  modern;  that  of  the  second,  from  simple  to 
complex;  and  that  of  the  third,  from  familiar  to  unfamiliar.  The  third 
order  is  the  one  here  adopted.  That  the  proper  method  of  studying 
geography  is  to  begin  with  the  locality  where  the  pupil  lives  is  now  well 
recognized.  Without  such  a  beginning  the  effect  on  the  student's  mind 
may  be  like  that  betrayed  by  the  schoolgirl,  who,  after  a  year's  study 
in  geography,  was  surprised  to  learn  that  her  own  playground  was  a  part 
of  the  surface  of  the  earth.  .  .  . 

This  book,  therefore,  aims  to  take  due  account  of  those  ideas  with 
which  the  student's  mind  is  already  furnished,  and  to  build  on  and  trans- 
form these  ideas  in  a  manner  adapted  to  the  mind  containing  them. 
This  is  especially  needful  where  the  ideas  are  apt  to  be  fallacious.  The 
economic  ideas  most  familiar  to  those  first  approaching  the  study  of 
economics  concern  money, — personal  pocket  money  and  bank  accounts, 
household  expenses  and  income,  the  fortunes  of  the  rich.  Moreover, 
these  ideas  are  largely  fallacious.  Therefore,  the  subject  of  money  is 
introduced  early  in  the  book  and  recurred  to  continually  as  each  new 
branch  of  the  study  is  unfolded.  For  the  same  reason  considerable  at- 
tention is  given  to  cash  accounting,  and  to  those  fundamental,  but  neg- 
lected principles  of  economics  which  underlie  accounting  in  general. 
Every  student  at  first  is  a  natural  "  mercantilist,"  and  every  teacher 
has  to  cope  eventually  with  the  prejudices  and  misconceptions  which 
result  from  this  fact.  Yet  no  textbook  has  apparently  attempted  to 
meet  these  difficulties  at  the  point  where  they  are  first  encountered, 
which  is  at  the  beginning.  .  .  . 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Business 
Organization  and  Combination 

An  Analysis  of  the  Evolution  and  Nature  of  Business  Or- 
ganization in  the  United  States  and  a  Tentative  So- 
lution of  the  Corporation  and  Trust  Problems 

BY  LEWIS    H.    HANEY,    PH.D. 

Professor  of  Economics  in  the  University  of  Texas.     Author 

of  "  A  Congressional  History  of  Railways  "  and 

"  History  of  Economic  Thought." 

Cloth,  8vo,  $2.00  net 

Dr.  Haney  in  his  treatment  of  business  organization  recog- 
nizes two  kinds :  business  that  is  productive  from  the  social 
point  of  view,  and  business  that  is  productive  only  from  the 
individual  point  of  view.  According  to  the  social  point  of 
view,  business  is  productive  when  it  adds  to  the  net  sum  of 
goods  and  services  which  men  want;  that  is,  when  the 
amount  of  food,  clothes,  books,  automobiles,  teaching,  medi- 
cal service,  etc.,  is  increased.  But  individuals  may  grow 
rich  in  ways  which  do  not  increase  the  net  sum  of  goods  and 
services  and  still  be  actively  engaged  in  business,  or  in  pro- 
duction from  the  individual  standpoint.  A  large  part  of  ad- 
vertising is  merely  acquisitive,  not  adding  anything,  but  tak- 
ing for  one  business  man  what  another  business  man  loses. 
So  it  is  with  some  "  speculation  "  and  some  middlemen's  ac- 
tivities. But  all  this,  when  recognized  as  lawful  and  when 
the  price  is  freely  paid,  Dr.  Haney  calls  "  business  " ;  and  in 
the  long  run,  he  holds,  the  test  of  a  good  business  man  is 
simply  the  amount  of  income  or  private  gain  which  he  ac- 
quires legally.  In  his  treatment  Dr.  Haney  has  recognized 
"  business  "  to  include  some  activities  which  add  nothing  to 
the  sum  total  of  society's  wealth. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  Tork 


ECONOMICS  OF  BUSINESS 

BY 
NORRIS   A.   BRISCO,   PH.D. 

Instructor  in  Political  Science  in  the  College  of  the  City  of  New  York 


Cloth,  xiv  +  390  pp.,  index,  izmo,  $1.50  net 


Business  principles  and  methods  are  discussed  in  this 
volume  in  clear,  untechnical  language,  and  in  such  a  man- 
ner as  to  make  the  work  one  which  may  be  read  intelli- 
gently by  the  novice  and  with  profit  by  the  business  man, 
and  which  may  be  used  to  advantage  as  a  text  in  college 
courses.  The  author's  knowledge  of  business  conditions 
and  methods  is  based  upon  his  personal  experience,  his 
work  in  the  classroom,  and  his  study  of  the  publicly  and 
privately  expressed  views  of  the  leading  experts  in  the 
various  lines  of  business  activity.  Among  the  topics 
treated  are  Organization,  Management,  Cost  Accounting, 
Efficiency  of  Methods,  Labor,  Buying,  Selling,  Advertising, 
Money  and  Credit,  Copyrights  and  Patents. 


THE  MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  Tork 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


MY      4  1962 


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HOO 


.MAR.1 


AU6  '3  1969 


brm  L9-32m-8,'58 (5876s4)444 


UCLA-GSM  Library 

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UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


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